Reference no: EM132811180

Among the transactions of WRY TO TWIST Company for the first two quarters of 20x1 were the following:

1. WRY recognized a ?200,000 write-down in its inventory during the first quarter. WRY had expected that the write-down will reverse in the second quarter, and in fact, in the second quarter, the recovery exceeded the previous write-down by ?40,000.
2. WRY provides warranty for its sales. In the first quarter, WRY estimated a 5% warranty obligation on its first quarter sales of ?2,000,000. In the second quarter, a change in accounting estimate was made. It was estimated that the cost of warranty should be 10% of total sales. The second quarter sales amounted to ?2,400,000.
3. WRY has been estimating its bad debt expense as 2% of credit sales. However, in the second quarter, a change was made to the percentage of ending receivable. Under this method, the required balance of the allowance for doubtful accounts as of June 30, 20x1 is computed at ?60,000. The allowance has a balance of ?10,000 at the beginning of the year. Total write-offs during the first six months of 20x1 amounted to ?24,000; recoveries totaled ?6,000. Credit sales for the 1st and 2nd quarters amounted to ?2,000,000 and ?4,000,000, respectively.

Requirement:

Problem 1: What are the effects of the transactions listed above on profit or loss before tax in the second quarter interim financial statements of WRY?