The Pine Corp

question 88

Multiple Choice

The Pine Corp. learns in July 2018 some new information about a lawsuit that first started in 2015. Pine Corp. had shown a liability of $2,000,000 related to this lawsuit in its December 31 balance sheets for 2015, 2016, and 2017. It now believes the liability will be only $1,500,000. Under GAAP, Pine Corp. should

• A) Restate the 2015, 2016, and 2017 statements to show a $1.5 million liability
• B) Restate only the 2017 statements to show a $1.5 million liability
• C) Not restate any prior year's liability, but reflect a benefit of $500,000 in the 2018 financial statements and disclose the change in estimate
• D) Not restate any prior year's liability, but reflect a benefit of $500,000 in the 2018 financial statements. It should not disclose the change in estimate

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Definitions:

Activity Levels

A measure used in cost accounting to evaluate the relation between the cost of a particular activity and the level of activity executed.

Operating Leverage

A measure of how revenue growth translates into growth in operating income, determined by the proportion of fixed versus variable costs a company has.

Contribution Margin

The difference between sales revenue and variable costs, indicating how much contributes towards covering fixed costs and generating profit.

Income from Operations

The earnings generated from a company's core business operations before subtracting interest and taxes.