Choice "C" is correct. The effect of the new estimate of warranty costs (from $100 to $110) is a change in estimate and will be reported in Year 2 income from continuing operations.Rule: Changes in estimates affect only the current and subsequent periods (not prior periods and not retained earnings).
Choice "d" is incorrect. An accounting change of principle is shown net of tax on the retained earnings statement.
Choice "b" is incorrect. Restating prior years financial statements is only required when comparative financial statements are shown for prior period adjustments of subsequently discovered corrections of errors, changes in entity or changes in accounting principle.
Choice "a" is incorrect. The facts stating a new estimate of warranty costs indicate a change of estimate, not a correction of an error.