The CFO of the Souta Microscope Corporation intentionally misclassified a downstream transportation expense in the amount of $66,375,000 as a product cost in an accounting period when the company made 11,800 microscopes and sold 7,800 microscopes. Souta rewards its officers with bonuses that are based on net earnings.
Required:
Indicate whether the elements on the financial statements (i.e., assets, liabilities, equity, revenue, expense, and net income) would be overstated or understated as a result of the misclassification of the upstream research and development expense.
Determine the amount of the overstatement or understatement for each element

Question

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andromache andromache · Answer 1 · 2020-05-25T18:38:01+02:00

Answer and Explanation:

Particulars Microscopes

Made units 11,800

Less : Sold units 7,800

Closing Inventory 4,000

Now

Cost per Microscope is

= $66,375,000 ÷ 11,800

= $5,625.

Now

The Portion of Transportation Cost still in hand in Ending Inventory is

= $5,625 × 4,000

= $22,500,000

Now the identification of the financial statement elements are as follows

Assets Overstated $22,500,000

Liabilities Not Affected

Retained earnings Overstated $22,500,000

Revenue Not Affected $22,500,000

Expense Understated $22,500,000

Net income Overstated $22,500,000

The liabilities and the revenue is not affected and the other items would affected accordingly