Answer:
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
