Show how the following independent errors will affect net income on the Income S
ID: 2523976 • Letter: S
Question
Show how the following independent errors will affect net income on the Income Statement and the stockholders' equity section of the Balance Sheet using the symbol + (plus) for overstated, - (minus) for understated, and 0 (zero) for no effect.
+-0
0+-
0+-
-0+
2. Failed to accrue 2017 interest revenue.0-+
0+-
0+-
0-+
3. A capital expenditure for factory equipment (useful life, 5 years) was erroneously charged to Maintenance Expense in 2017.0+-
+0-
0-+
-0+
4. Failed to count office supplies on hand at 12/31/17. Cash expenditures have been charged to Supplies Expense during the year 2017.-0+
-+0
+0-
+-0
5. Failed to accrue 2017 wages.0-+
+-0
0+-
+0-
6. Ending inventory in 2017 understated.+-0
-0+
0+-
+-0
7. Overstated 2017 depreciation expense; 2018 expense correct.0+-
+-0
-0+
-0+
Explanation / Answer
Statement showing effect on Income statement and Balance Sheet
Working Notes:-
1) If ending inventory of 2017 is overstated then it will overstate the income statement and balance sheet for 2017 and it will understate the income statement of next year as opening inventory (i.e. 2018). There will be no effect on Balance sheet of 2018.
2) In this case interest revenue for 2017 will be understated which will understate the income statement and balance sheet of 2017 and overstate the 2018 income statement as interest will be received in cash in 2018.
3) Excess maintenance expense charged in 2017 will understate the income statement and balance sheet of 2017 and depreciation is required to be charged in 2018 for capital expenditure which will not be charged and hence result in overstatement of income statement of 2018.
4) Excess charge of supplies expense will understate the income statement and balance sheet of 2017.
5) Unrecorded accrued wages will overstate the income statement and balance sheet of 2017.
6) If ending inventory is understated, then it will understate the income statement and balance sheet for 2017 and it will overstate the income statement of next year as opening inventory (i.e. 2018). There will be no effect on Balance sheet of 2018.
7) Overstated Depreciation in 2017 will understate the the income statement and balance sheet for 2017.
2017 2018 No. Particulars Income Statement Balance Sheet Income Statement Balance Sheet 1 Ending inventory in 2017 overstated. + + - 0 2 Failed to accrue 2017 interest revenue - - + 0 3 A capital expenditure for factory equipment (useful life, 5 years) was erroneously charged to Maintenance Expense in 2017. - - + - 4 Failed to count office supplies on hand at 12/31/17. Cash expenditures have been charged to Supplies Expense during the year 2017 - - + 0 5 Failed to accrue 2017 wages. + + - 0 6 Ending inventory in 2017 understated. - - + 0 7 Overstated 2017 depreciation expense; 2018 expense correct. - - 0 -Related Questions
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