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Freda Ltd decided to change its accounting for long service leave in order to accrue expense sooner than had been done previously. The effect on provision for employee entitlements as at the end of 2011 was to increase it by $14 000. By the end of 2009, the liability would go up by $21 000. The company’s income tax rate is 35%.
-What would be the effect of the change on 2011 net profit?
A) It would be $9100 higher.
B) It would be $9100 lower.
C) It would be $14 000 higher.
D) It would be $14 000 lower.

Question

Quizplus · Accepted Answer

The increase in provision for employee entitlements by $14,000 would reduce the net profit. After accounting for the tax effect (35% of $14,000), the net profit would decrease by $9,100.

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