Question

For each of the following situations, indicate whether assets, liabilities, equity, revenues, and expenses are overstated (too high), understated (too low), or unaffected by the error in the December 31, 2017 financial statements. Briefly explain why the effects occur and state any assumptions that you make.
a. On January 3, 2017, a three-year insurance policy was purchased for $9,000 cash.
The bookkeeper debited prepaid insurance for $9,000 when the policy was pur chased. No adjusting entry was made at year-end.
b. On December 15, 2017, $400 was received from a customer paying in advance for lawn care services that were going to be provided in 2018. The bookkeeper credited revenue for $400 when the cash was received.
c. On December 31, 2017, no entry was made to reflect the use of electricity during the month of December. The bill for electricity won't be received until late February.
In December 2016, the company used $2,000 of electricity and management esti mates that about the same amount was used this year.
d. On September 1, 2017, the company invested $1,000,000 in government bonds that pay interest on September 1 and March 1 of each year. The interest rate is 5 percent per year. No adjusting entry was made.
e. On July 17, 2017, a $5,750 cash expense for casual labour was recorded as $7,570.



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  • CreatedFebruary 26, 2015
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