For 2017, P Co. estimated its two-year equipment warranty costs based on $23 per unit sold in 2017. Experience during 2018 indicated that the estimate should have been based on $25 per unit. The effect of this $2 difference from the estimate is reported:
A) In 2018 income from continuing operations.
B) As an accounting change, net of tax, below 2018 income from continuing operations.
C) As an accounting change requiring 2017 financial statements to be restated.
D) As a correction of an error requiring 2017 financial statements to be restated.

Question

Quizplus · Accepted Answer

The change in the estimate for warranty costs is based on new information obtained from experience and qualifies as a change in accounting estimate. A change in accounting estimate affects current and future periods and is not accounted for by restating prior periods. The accounting change is a part of continuing operations but is not reported net of taxes.