Gore Inc. recorded a liability in 2009 for probable litigation losses of $2 million. Ultimately, $5 million in legitimate warranty claims were filed by Gore's customers.

Question

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Gore's liability for probable litigation losses was initially estimated to be $2 million. However, the actual warranty claims filed by customers were $5 million, which is higher than the estimated amount. This situation represents a change in accounting estimates, and as per accounting standards, such a change should be recorded prospectively. Therefore, Gore is required to adjust the estimated loss amount to $5 million for the year in which the actual claims were filed, without adjusting the prior period's financial statements. This adjustment will impact the net income and balance sheet of the year in which it is made, but not the prior period's financial statements.

Gore Inc Recorded a Liability in 2009 for Probable Litigation Losses