Reference no: EM132684045

In recent years, Ayayai Inc. has reported steadily increasing income. The company reported income of $22,000 in 2017, $27,500 in 2018, and $33,000 in 2019. Several market analysts have recommended that investors buy Ayayai Inc. shares because they expect the steady growth in income to continue. Ayayai is approaching the end of its 2020 fiscal year, and it looks to be a good year once again. However, it has not yet recorded warranty expense.

• Based on prior experience, this year's warranty expense should be around $5,500, but some members of top management have approached the controller to suggest that a larger, more conservative warranty expense should be recorded this year. Income before warranty expense is $47,300. Specifically, by recording an $8,800 warranty accrual this year, Ayayai could report an income increase for this year and still be in a position to cover its warranty costs in future years.

Problem 1: Calculate the effect of the proposed accounting in 2020 and 2021. Assume the same income before warranty expense for both 2020 and 2021, and total warranty expense over the two-year period of $11,000.