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Intermediate Accounting: Reporting...
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Intermediate Accounting: Reporting...
Effects of Errors: During the current accounting period. Page Company makes the following errors. The company uses a perpetual inventory system.
Required:
Indicate the effect of each error on the net income, total assets, total liabilities, and total shareholders’ equity at the end of the accounting period by using the following code: O = overstated, U = understated, N = no effect. Disregard income taxes.
Indicate the effect of each error on the net income, total assets, total liabilities, and total shareholder’s equity at the end of the accounting period.
Errors: An error is a mistake committed in the process of book-keeping or in accounting. In some cases, errors may be committed but, they will not affect the totals of the trial balance. Such error can be detected while preparing the trial balance or would be indicated by the unusual account balance.
Indicate the effect of each error on the net income, total assets, total liabilities, and total shareholder’s equity at the end of the accounting period as follows:
| Serial number | Error |
Net income | Total assets | Total liabilities |
Total shareholder’s equity |
| 1. | The purchase of equipment for cash is recorded as a debit to equipment and a credit to accounts payable. | N | O | O | N |
| 2. | Failed to record the purchase of inventory on credit. | N | U | U | N |
| 3. | Cash received from a customer in payment of its account is recorded as if the receipt were for a current period sale. | O | O | N | O |
| 4. | Failed to record a credit sale. | U | U | N | U |
| 5. | At the end of the year, the receipt of money from a 60-day, 12% bank loan is recorded as a debit to cash and a credit to sales revenue. | O | N | U | O |
| 6. | Failed to record the depreciation at the end of the current period. | O | O | N | O |
Table (1)
1. The purchase of equipment for cash is recorded as a debit to equipment and a credit to accounts payable: In this case, the amount of equipment is wrongly credited in the accounts payable account instead of cash account, and it increases the value of total assets and liabilities. There is no affect in the net income and total shareholder’s equity as this error affects only assets and liabilities account.
2. Failed to record the purchase of inventory on credit: In this case, inventory purchased on credit is not recorded in the inventory and accounts payable account...
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