CP$5-6($Static$)$ Making a Decision as an Auditor: Effects of Errors on Income, Assets, and Liabilities LO$-5-1,5-3$

Megan Company $($not a corporation$)$ was careless about its financial records during its first year of operations, the current year. It is December $31$ of the current year the end of the annual accounting period. An outside CPA has examined the records and discovered numerous errors, all of which are described here. Assume that each error is independent of the others.

Required:

Analyze each error and indicate its effect on the current year's and the next year's net income, assets, and liabilities if not corrected. Do not assume any other errors. Use these codes to indicate the effect of each dollar amount: O $=$ overstated, U $=$ understated, and NE $=$ no effect. The first transaction is used as an example.

Note: Enter all values as positive values. Effect On

Net Income Assets Liabilities

Current Year Next Year Current Year Next Year Current Year Next Year

$2.$ Wages earned by employees during the current year not recorded or paid in the current year but recorded and paid in the next year, $$500.$ U O U O

$$500$ $$500$ $$500$ $$500$

$3.$ Revenue earned during the current year but not collected or recorded until the next year, $$600.$ U O U O

$$600$ $$600$ $$600$ $$600$

$4.$ Amount paid in the current year and recorded as expense in the current year but not an expense until the next year, $$200.$

$5.$ Revenue collected in the current year and recorded as revenue in the current year but not earned until the next year, $$900.$ O U O

$$900$ $$900$ $$900$

$6.$ Sale of services and cash collected in the current year. Recorded as a debit to Cash and as a credit to Accounts Receivable, $$300.$ O

$$300$

$7.$ On December $31$ of the current year, bought land on credit for $$8,000$; not recorded until payment was made on February $1$ of the next year.