**Case Study on Error in Financial Statement Reporting****Background:**The Richards Company purchased a five-year extended warranty for all its equipment on March 1, 2019, at a cost of $540,000. This warranty took effect immediately. The fiscal year aligns with the calendar year.**Scenario:**Consider the impact if Richards mistakenly or intentionally recorded the entire $540,000 as an expense in 2019. Assuming all other accounting practices adhered to Generally Accepted Accounting Principles (GAAP), analyze the implications on the financial statements for the year 2019.**Table Instructions:**Identify the impact of this misclassification on each category by placing a check mark in the appropriate column.---**Impact on Reported Figures for 2019 if the Total Payment Had Been Expensed When Paid:**- **Categories to Evaluate:** - Assets - Liabilities - Owners’ Equity (Retained Earnings) - Revenues - Expenses - Income- **Impact Options:** - Overstated - Understated - No Effect*Note: No numerical values are required for this assessment; solely focus on the qualitative impact analysis.*

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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**Case Study on Error in Financial Statement Reporting**

**Background:**

The Richards Company purchased a five-year extended warranty for all its equipment on March 1, 2019, at a cost of $540,000. This warranty took effect immediately. The fiscal year aligns with the calendar year.

**Scenario:**

Consider the impact if Richards mistakenly or intentionally recorded the entire $540,000 as an expense in 2019. Assuming all other accounting practices adhered to Generally Accepted Accounting Principles (GAAP), analyze the implications on the financial statements for the year 2019.

**Table Instructions:**

Identify the impact of this misclassification on each category by placing a check mark in the appropriate column.

---

**Impact on Reported Figures for 2019 if the Total Payment Had Been Expensed When Paid:**

- **Categories to Evaluate:**
- Assets
- Liabilities
- Owners’ Equity (Retained Earnings)
- Revenues
- Expenses
- Income

- **Impact Options:**
- Overstated
- Understated
- No Effect

*Note: No numerical values are required for this assessment; solely focus on the qualitative impact analysis.*

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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