Gore Inc. recorded a liability in 2018 for probable litigation losses of $2 million. Ultimately, $5 million in legitimate warranty claims were filed by Gore's customers.
A) Gore has made a change in accounting principle, requiring retrospective adjustment.
B) Gore needs to correct an accounting error.
C) Gore is required to adjust a change in accounting estimate prospectively.
D) Gore is not required to make any accounting adjustments.

Question

Quizplus · Accepted Answer

The initial liability recorded by Gore for probable litigation losses was an estimate made at a point in time based on information available. However, the actual warranty claims filed by customers exceeded the estimated amount, indicating that the initial estimate was incorrect. In such cases, GAAP requires companies to adjust the estimate prospectively rather than retroactively. Hence, Gore is required to adjust a change in accounting estimate prospectively.

Gore Inc Recorded a Liability in 2018 for Probable Litigation Losses