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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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The following are independent errors made by a company that uses a periodic inventory system:

  1. a. failure to record a purchase of inventory on credit (however, inventory was properly counted at the end of the period)
  2. b. expensing the purchase of a machine
  3. c. failure to accrue wages
  4. d. failure to record an allowance for uncollectibles
  5. e. including collections in advance as revenue
  6. f. including payments in advance as expenses
  7. g. failure to accrue warranty costs
  8. h. discount on a note payable issued for purchase of a machine is ignored
  9. i. failure to record depreciation expense on assets purchased during the year

Required:

Next Level Indicate the effect of each of the preceding errors on the company’s assets, liabilities, shareholders’ equity, and net income in the year in which the error occurs. State whether the error causes an overstatement (+), an understatement (−), or no effect (NE).

To determine

Mention the effect of the given errors on the company’s assets, liabilities, shareholders, equity, and net income, in the year the error occurred.

Explanation

Errors: The comparability and consistency of the financial statements decreases when a company records arithmetic mistakes, or errors. Such errors do require adjustments to make the financial information more reliable, and more relevant.

Effect of the errors:

a.

Failure to record credit purchase:

Effect:

Net IncomeAssetsLiabilitiesShareholders’ Equity
+NE+

Table (1)

Justification:

RevenuesExpensesNet IncomeAssetsLiabilitiesShareholders’ Equity
 Understated expensesOverstated income Understated accounts payableOverstated retained earnings

Table (2)

b.

Expensing the cost of machine:

Effect:

Net IncomeAssetsLiabilitiesShareholders’ Equity
NE

Table (3)

Justification:

RevenuesExpensesNet IncomeAssetsLiabilitiesShareholders’ Equity
 Overstated expensesUnderstated incomeUnderstated machine value Understated retained earnings

Table (4)

c.

Failure to accrue wages:

Effect:

Net IncomeAssetsLiabilitiesShareholders’ Equity
+NE+

Table (5)

Justification:

RevenuesExpensesNet IncomeAssetsLiabilitiesShareholders’ Equity
 Understated expensesOverstated income Understated wages payableOverstated retained earnings

Table (6)

d.

Failure to record allowance for uncollectible accounts:

Effect:

Net IncomeAssetsLiabilitiesShareholders’ Equity
++NE+

Table (7)

Justification:

RevenuesExpensesNet IncomeAssetsLiabilitiesShareholders’ Equity
 Understated expensesOverstated incomeOverstated accounts receivables Overstated retained earnings

Table (8)

e.

Recorded unearned revenue as revenue:

Effect:

Net IncomeAssetsLiabilitiesShareholders’ Equity
+NE+

Table (9)

Justification:

RevenuesExpensesNet IncomeAssetsLiabilitiesShareholders’ Equity
Overstated revenues Overstated income Understated unearned revenueOverstated retained earnings

Table (10)

f...

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