Question

Tableau DA 9-3: Mini-Case, Analyzing warranty liabilities LO P4

1. Looking at past years, does it appear that Arctica has usually underestimated or overestimated its warranty liabilities?
2. How would we suggest Arctica change its estimates of warranty liabilities in future periods?
3. Management tells us that Arctica plans to keep estimated warranty expense percentages to a minimum next year. Why might management want to keep these percentages low?
4. Alternatively, assume management informs us that Arctica had a great year and has very high net income. However, management is now concerned about high taxes, which are calculated as a percentage of net income. What might management try to do to lower Arctica’s taxes?

Question 1 Options:
a. Neither overestimated nor underestimated
b. Overestimated
c. Underestimated

Question 2 Options:
a. Decrease warranty estimate percentage
b. Increase warranty estimate percentage
c. Keep estimate percentages the same
d. No longer estimate warranty expenses

Question 3 Options:
a. To decrease net income to show a "smooth" earnings pattern
b. To increase management bonus that is based on net income.
c. To limit the amount of parts needing to be purchased.
d. To limit the number of warranty claims

Question 4 Options:
a. Decrease warranty estimate percentages
b. Increase warranty estimate percentages
c. Limit parts purchased for warranty claims
d. Limit the number of warranty claims

I got underestimated for the first question. I need help with the others. Much appreciated.

Answer 1

Increasing warranty estimate percentage, keep estimate percentages low to decrease net income, and increasing warranty estimate percentages to lower taxes.

Step-by-step explanation:

For question 2, we would suggest Arctica to increase its warranty estimate percentage in future periods. Increasing the estimate percentage would reflect a more accurate estimation of warranty liabilities, potentially avoiding underestimation and unexpected costs.

For question 3, management might want to keep these percentages low because it would decrease net income and show a 'smooth' earnings pattern. This could be beneficial for various reasons such as maintaining investor confidence or achieving certain financial goals.

For question 4, to lower Arctica's taxes, management might try to increase warranty estimate percentages. By increasing the estimate percentages, Arctica's net income would decrease, resulting in lower taxable income and potentially reducing the tax liability.

Answer 2

Answer 2 - Increase Warranty estimate percentages

Answer 3 - To Increase management bonus that is based on net income

Answer 4 - Increase warranty Estimate percentages

Step-by-step explanation:

Answer 2 - Total Warranty was above their estimate, if they increase the percentage they will be closer to the actual

Answer 3 - Bonus is based on net income, the higher the net income the better your bonus, you can change this based on the percentage you estimate.

Answer 4 - the more they spend the less taxes they will incur.