Crystal Lake Industries manufactures high-end chain saws. The company began operations on January 1, 2020 and reported net income of $168,000 in 2020.

The following excerpts are from the companys December 31, 2022 preliminary financial statements:

	For the Year Ended
	December 31,
	Preliminary 2022	2021
Income before taxes	$ 740,000	$ 650,000
Income taxes	222,000	195,000
Net income	$ 518,000	$ 455,000
	Preliminary 2022	2021
Retained earnings, January 1	$ 623,000	$ 168,000
Net income	518,000	455,000
Retained earnings, December 31	$ 1,141,000	$ 623,000

The following items must be addressed before final 2022 comparative financial statements can be issued:

On January 1, 2021 the company purchased a $600,000 machine. The company depreciated the machine using the double-declining balance method for 2021 and for the preliminary 2020 statements (assuming no salvage value and a 5-years life). Accordingly, depreciation expense was $240,000 for 2021 and is preliminarily $144,000 for 2022. These amounts are included in arriving at the above income before tax amounts.

However, management would like to revise depreciation because they believe a 10-year straight line method is more reflective of the assets characteristics. Management will make this revision effective for the 2022 financial statements. (You may assume that the same revised method will be used for tax purposes also.)

The 2022 financial statement audit revealed that the company had been incorrectly using a non-GAAP method for reporting warranty expenses. Since inception in 2020 and through the preliminary 2022 statements, the company has used the cash-basis for recognizing warranty expenses. This is appropriate for income tax reporting, but is not appropriate for GAAP. The following shows the cash-based and accrual-based warranty costs:

	Cash basis	Accrual basis
2020	$ 20,000	$ 30,000
2021	40,000	45,000
2022	32,000	50,000
	$ 92,000	$ 125,000

Instructions

Determine the appropriate warranty liability and the related deferred tax asset/liability as of December 31, 2022.

Prepare the journal entries necessary at December 31, 2022 to reflect the error correction and the change in accounting estimate.

Present the summary income statements and statements of retained earnings for 2021 and 2022 to appropriately reflect the events described above. (The companys tax rate is 30% for all years.)