A Company Switched from the Cash Basis to the Accrual

Multiple Choice

A company switched from the cash basis to the accrual basis for recognizing warranty expense. The unrecorded liability for warranties was $2 million at the beginning of the year. Its tax rate is 30%. The company booked a year-end warranty liability of $3 million. As a result of this change, the firm would:

A) Report a prior period adjustment decreasing retained earnings by $600,000.
B) Report a prior period adjustment decreasing retained earnings by $1,400,000.
C) Report a current period charge decreasing net income by $600,000.
D) Report a current period charge decreasing net income by $1,400,000.