The Richards Company paid for a five-year extended warranty on all oftheir equipment on March 1, 2019 costing $540,000 that went into effectimmediately. The fiscal year is the calendar year.what if Richards mistakenly or purposely charged the entire total as an expensein 2019? Assuming that all other accounting during the year had beenperformed correctly, i.e. in a consistent manner under GAAP (GenerallyAccepted Accounting Principles), in what ways would this error affect overalltotals for 2019 of the six items below.No dollar figures are required in this table. Just place one check mark in eachcolumn to identify the impact of this misclassification on that category.Impact On Reported Figures For 2019 if the total payment had been expensed when paid.(Place One Check Mark in Each Column Below)Owners'Assets LiabilitiesEquity(RetainedEarnings)ImpactRevenuesExpensesIncomeOverstatedUnderstatedNo Effect

Answered: The Richards Company paid for a…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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The Richards Company paid for a five-year extended warranty on all of
their equipment on March 1, 2019 costing $540,000 that went into effect
immediately. The fiscal year is the calendar year.
what if Richards mistakenly or purposely charged the entire total as an expense
in 2019? Assuming that all other accounting during the year had been
performed correctly, i.e. in a consistent manner under GAAP (Generally
Accepted Accounting Principles), in what ways would this error affect overall
totals for 2019 of the six items below.
No dollar figures are required in this table. Just place one check mark in each
column to identify the impact of this misclassification on that category.
Impact On Reported Figures For 2019 if the total payment had been expensed when paid.
(Place One Check Mark in Each Column Below)
Owners'
Assets Liabilities
Equity
(Retained
Earnings)
Impact
Revenues
Expenses
Income
Overstated
Understated
No Effect

Expert Solution

Step 1

Given that,

Richard company paid five years warranty on all of their equipment on March 1, 2019

Costing = $540000

From the above, paying the cost for warranty on equipment is a capital cost on equipment since the capital cost have benefit for the equipment. Capital cost is the cost of an asset where it adds the benefit to the assets.

Therefore, the cost of warranty card should be added to the equipment cost.

Step 2

Also given that,

Keeping other things same,

By mistakenly, The Richard company charged the entire amount of warranty on equipment to the expense.

Here, when the capital cost is treated as expense, then there will be a total impact on revenues, profits and assets and equity earnings

When the capital cost is treated as expense, then

Under value of asset since the asset value decrease
Under value of equity earnings since the profit will decrease
Under value of revenues since with increase in expense
Over value of expense since capital cost treated as expense
Under value of income since increase in expense

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