Prepare the journal entries that would be necessary to adjust for each of the four misstatements provided in the case. Evaluate the total dollar effect of the adjustments on Total Revenues, Total Expenses, Net Income, Total Current Assets, Total Assets, and Total Liabilities.

Warranty Expense: warranty expense in the current year is estimated to be understated by $130,000 based on the following information: EyeMax grants a written one-year warranty for all products, and estimates of warranty expense based on current-year sales have been properly recorded. However, during the last two years, the company has been making verbal commitments to repair or replace all products for a two-year period. The company has been complying with its verbal commitments and intends to continue the practice to improve customer relations. Because of this change in warranty policy, analysis of warranty repair and replacement data supports a $130,000 addition to the warranty expense estimate for the current year.

Repair and Maintenance Expense: Repair expense in the current year is understated by $200,000. The client inappropriately capitalized $240,000 of cost related to modifications to its production process. Because the modifications were unsuccessful, the full amount should be written off in the current year. The client has included one-sixth of the capitalized amount in depreciation expense for the year, therefore, net of the amount included in depreciation expense for the current year, overall expense in the current year is understated by $200,000.

Litigation Expense: Product liability expense is overstated by $50,000 based on the following information: The client maintains product liability insurance with a $50,000 per occurrence deductible. The client has an excellent record relating to product liability. One liability case was pending at year-end, and the client had conservatively accrued $50,000 at year-end to provide for the potential loss even though the likelihood of loss was remote. A judge ruled the case was without merit shortly after year-end.

Accounts Receivable: The major audit work in the accounts receivable area was confirmation of customer balances. At year-end, EyeMax had receivables from 1,545 customers with a book value of approximately $12,600,000. Based on preliminary estimates, a random sample of 40 accounts was selected for positive confirmation. Customer reported differences and alternative audit procedures applied to non replies revealed misstatements in four accounts. The misstatements all appeared to be unintentional. The net effect of the misstatements is an overstatement of accounts receivable (and sales) at year-end.