The following income statement was prepared for Frame Supplies for the year Year 1:

FRAME SUPPLIES
Income Statement
For the Year Ended December 31, Year 1
Sales	$	72,250
Cost of goods sold		(32,380	)
Gross margin		39,870
Operating expenses		(8,760	)
Net income	$	31,110

During the year-end audit, the following errors were discovered:

1. An $1,582 payment for repairs was erroneously charged to the Cost of Goods Sold account. (Assume that the perpetual inventory system is used.)
2. Sales to customers for $2,222 at December 31, Year 1, were not recorded in the books for Year 1. Also, the $1,683 cost of goods sold was not recorded.
3. A mathematical error was made in determining ending inventory. Ending inventory was understated by $712. (The Inventory account was mistakenly written down to the Cost of Goods Sold account.)

Required
Determine the effect, if any, of each of the errors on the following items. Give the dollar amount of the effect and whether it would overstate (O), understate (U), or not affect (NA) the account. The first item for each error is recorded as an example.

Give the dollar amount of the effect and state whether the payment made for repairs erroneously charged $1,582 to the Cost of Goods Sold account would overstate (O), understate (U), or not affect (NA) the account. The first item of the error is recorded as an example. (Input the amount as a positive value.)

Error No. 1	Amount of Error	Effect
Sales, Year 1	NA	NA
Ending inventory, December 31, Year 1
Gross margin, Year 1
Beginning inventory, January 1, Year 2
Cost of goods sold, Year 1
Net income, Year 1
Retained earnings, December 31, Year 1
Total assets, December 31, Year 1

Give the dollar amount of the effect and state whether Sales to customers for $2,222 at December 31, Year 1, along with its cost of goods sold $1,683 not recorded in the books would overstate (O), understate (U), or not affect (NA) the account. The first item of the error is recorded as an example. (Input the amount as a positive value.)

Error No. 2	Amount of Error	Effect
Sales, Year 1	$2,222	U
Ending inventory, December 31, Year 1
Gross margin, Year 1
Beginning inventory, January 1, Year 2
Cost of goods sold, Year 1
Net income, Year 1
Retained earnings, December 31, Year 1
Total assets, December 31, Year 1

Give the dollar amount of the effect and state whether a mathematical error made in determining ending inventory understating the same by $712 would overstate (O), understate (U), or not affect (NA) the account. The first item of the error is recorded as an example. (Input the amount as a positive value.)

Error No. 3	Amount of Error	Effect
Sales, Year 1	NA	NA
Ending inventory, December 31, Year 1
Gross margin, Year 1
Beginning inventory, January 1, Year 2
Cost of goods sold, Year 1
Net income, Year 1
Retained earnings, December 31, Year 1
Total assets, December 31, Year 1

Answer rating: 100% (QA)

Anwers Error No 1 Payment for repairs erroneously charged to Cost of Goods Sold account Amount of Error 1582 Effect Sales Year 1 NA No effect Ending i... View the full answer