Acompany overstated its liability for warranties by $200,000. its tax rate is 30%.

as a result of this error, income tax expense is:

a. unaffected

b. overstated by $60,000

c. overstated by $140,000

d. understated by $60,000

The income tax expense would have been understated by $60,000(D)

Explanation:

Since the liability has been overstated by $200,000, certainly its warranty expense has equally been overstated  by the same amount.

The higher the expenses, the lower the tax base and the lower the tax expense  or liability.

Understatement = 30% ×$200,000 = $60,000

Hence, the tax liability of the company will increased by $60,000.

Option (a) False. This will be so if the warranty liability is accurately predicted i.e warranties liability is neither understated nor overstated.

Option (b) False. This will be so if the warranties liability has been understated.

Option (c) False.

Option (d) True

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