The following income statement was prepared for Frame Supplies for Year 1: FRAME SUPPLIES Income Statement For

Question:

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

FRAME SUPPLIES Income Statement For the Year Ended December 31, Year 1

Sales ........................................................................ $ 250,000
Cost of goods sold ..................................................(140,000)
Gross margin ...........................................................110,000
Operating expenses ................................................(69,500)
Net income ..............................................................$ 40,500

During the year-end audit, the following errors were discovered:
1. A $2,500 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 $1,800 at December 31, Year 1, were not recorded in the books for Year 1. Also, the $980 cost of goods sold was not recorded.
3. A mathematical error was made in determining ending inventory. Ending inventory was understated by $2,150. (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.

Error No. 1 Amount of Error Effect Sales, Year 1 Ending inventory, December 31, Year 1 Gross margin, Year 1 Beginning in