A company overstated its liability for warranties by $200,000. Its tax rate is 30%. As a result of this error, income tax expense is:

Question

Quizplus · Accepted Answer

Since the company overstated its liability for warranties by $200,000, its expenses will be overstated by the same amount. This means that the company's taxable income will be reduced by $200,000, resulting in a tax reduction of $60,000 ($200,000 x 0.3). Therefore, income tax expense will be understated by $60,000.

A Company Overstated Its Liability for Warranties by $200,000