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

answer: in the short-run firms will respond by raising the price of turkey.

explanation: initially the long-run equilibrium is at a price of $5 per pound of turkey and a quantity of 50 million pounds per year. now, when webmd claims that a protein found in turkey will increase your expected lifespan by 4 years. the consumers demand for turkey will increase at every price shifting the demand curve to the right from d1 to d2. while, there will be no change in the supply curve in the short-run as it is not possible for producers to adjust supply so quickly. as a result the new equilibrium will occur at a higher price and a higher quantity of turkey.

thus, in the short run firms will respond by increasing the price of turkey, selling more quantity at a higher price and earning economic profits.