During a maternity leave of the full-time bookkeeper, a temporary employee was involved in the following...
During a maternity leave of the full-time bookkeeper, a
temporary employee was involved in the following
transactions.
1.
A payment by cheque for $480 to a repair shop for fixing the truck
was debited to the Vehicles account and a credit to Cash.
2.
A deposit for a collection on account of $1,000 was debited to Cash
and credited to Service Revenue.
3.
A cheque for $440 to pay for advertising expense was recorded as a
Debit to Rent Expense and a credit to Cash.
4.
An invoice to a customer recorded for services rendered in the
amount $550 was debited to Service Revenue and credited to Accounts
Receivable.
5.
A payment of interest on a note payable in the amount of $40 was
debited to Notes Payable and credited to Cash. No amount had been
accrued for this interest.
6.
A payment to a supplier, for an earlier purchase on account of
$260, was recorded as a debit to Accounts Payable for $26 and a
credit to Cash for $26.
Indicate the impact of each error on the balance sheet and income
statement by stating whether assets, liabilities, owner’s equity,
revenues, expenses, and profit are understated, overstated, or if
there is no effect.
Balance Sheet
Income Statement
Assets
Liabilities
Owner's Equity
Revenue
Expenses
Profit
1
Understated
Overstated
No Effect
Understated
Overstated
No Effect
Understated
Overstated
No Effect
Overstated
No Effect
Understated
Overstated
No Effect
Understated
Understated
Overstated
No Effect
2
No Effect
Overstated
Understated
Overstated
Understated
No Effect
Overstated
No Effect
Understated
Understated
Overstated
No Effect
Understated
Overstated
No Effect
No Effect
Understated
Overstated
3
No Effect
Overstated
Understated
Overstated
No Effect
Understated
Understated
Overstated
No Effect
Overstated
No Effect
Understated
No Effect
Understated
Overstated
Understated
Overstated
No Effect
4
No Effect
Understated
Overstated
Understated
No Effect
Overstated
Understated
Overstated
No Effect
Understated
Overstated
No Effect
Overstated
No Effect
Understated
No Effect
Overstated
Understated
5
Overstated
No Effect
Understated
Understated
No Effect
Overstated
No Effect
Understated
Overstated
Understated
Overstated
No Effect
Understated
No Effect
Overstated
No Effect
Understated
Overstated
6
Overstated
No Effect
Understated
No Effect
Understated
Overstated
Understated
No Effect
Overstated
Overstated
Understated
No Effect
Overstated
No Effect
Understated
Understated
Overstated
No Effect
Homework Answers
|
Assets |
Liabilities |
Owner's Equity |
Revenue |
Expenses |
Profit |
|
|
1 |
Overstated |
No effect |
Overstated |
No effect |
Understated |
Overstated |
|
2 |
Overstated |
No effect |
Overstated |
Overstated |
No effect |
Overstated |
|
3 |
No effect |
No effect |
No effect |
No effect |
No effect |
No effect |
|
4 |
Understated |
No effect |
Understated |
Understated |
No effect |
Understated |
|
5 |
No effect |
Understated |
Overstated |
Overstated |
Understated |
Overstated |
|
6 |
Overstated |
Overstated |
No effect |
No effect |
No effect |
No effect |
Explanation for each point
- Expense for repair should have been debited but instead asset account is debited by mistake so asset is overstated and at the same time expenses are understated. Since expenses are understated Profit and shareholder’s equity will be overstated.
- A decrease in asset is recorded as a revenue which overstated the revenue and profit and ultimately shareholder’s equity. Since asset was suppose to decrease but due to error asset is overstated too.
- No effect on any think because error was a compensating error. Both expenses accounts are interchanged and overall effect is nil.
- Asset is understated with understatement of revenue and profit.
- Wrongfully liability was decreased instead of recording expense.
- Understatement in liability and asset is same but have no effect on revenue income and shareholder’s equity.
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