Question

Jennine manufactures rubber gloves and face shields in the Washington State. Her firm tried to cut costs by relying on an intern to complete the accounting function. The intern mistakenly classified a product cost as an expense that totaled $13,300. Her produced 1,330 units of product and sold 665 of them during the year. Management is paid a bonus equal to 2% of net income. In the year in which the mistake was made:

Multiple Choice

a. management bonuses were underpaid.

b. the company's income statement portrayed a more favorable position than actually existed.

c. product costs were overstated.

d. the company's net income was overstated.

Answer 1

Answer:

Mmanagement bonuses were underpaid

Explanation to the above answer is as under:

Here it was given that intern mistakenly classified a product cost as an expense that totalled $13,300 so we can say that product costs were understated because $13,300 should be classified as an expense.

Because of this following effect on the income statement is affected as follows:

First effect

Average cost per unit

= Product costs ÷ Number of units produced Average cost per unit

= 13,300 ÷ 1,330 units

= $10 per unit

Cost of goods sold

= Number of units sold x Average cost per unit Cost of goods sold

= 665 x 10

= 6,650

So we can Understatement of cost of goods sold in the amount of $6,650

Second effect

Overstatement of selling & Admin exp = $13,300

The understatement of cost of goods sold of $6,650 will be offset by the overstatement of selling and administrative expenses of $13,300 which will result in an understatement of net income in the amount of $6,650 which is not favourable effect.

Here management are given bonus of 2% of net income, the bonus was underpaid as a result.