Because of the large change in net income, XYZ Auditors

benchmarked materiality on total assets instead of net income before taxes. XYZ Auditors have

determined that overall materiality is .5% of total assets. From their calculation, overall

materiality is $1,666,667 and performance materiality is 60% of overall materiality, or

$1,000,000. Note that amounts in parentheses on the table on the next page are reductions in the

respective account while positive amounts are increases in the respective account.

Based on the information given above and in the table on the next page, which misstatements, if

any, are material? In one or two brief sentences, justify why the misstatements you select are

material.

Misstatement # Proposed Adjusting Entry Assets Liabilities Equity Revenues Expenses Inventory 150, 000 Accounts Payable* 150, 000 To correct for inventory in transit at 12 /31 2 Revenue ( 100, 000 ) Accounts Receivable* ( 100 , 000 ) To correct for sales cut- off error . } Common Stock 250, 000 Convertible Debt ( 250, 000 ) Stock warrants originally classified as equity now classified as liability . Hedged Debt ( 170, 000 ) AOCI* 170, 000 To record change in fair- value of hedge 5 Bonus Expense ( 2, 000, 000 ) Payroll Expense 2, 000 , 000 To reclassify normal payroll expense*