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

Answer and Explanation:

Particulars  Microscopes

Made units         11,800

Less : Sold units7,800

Closing Inventory4,000

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

LiabilitiesNot Affected  

Retained earningsOverstated$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