Effect of recording errors on financial statements. Forgetful Corporation neglected to make various adjusting entries on December

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Effect of recording errors on financial statements. Forgetful Corporation neglected to make various adjusting entries on December 31, Year 8, the end of its


accounting period. Indicate the effects on assets, liabilities, and shareholders' equity on December 31, Year 8, of failing to adjust for the following independent items as appropriate, using the notation \(\mathrm{O} / \mathrm{S}\) (overstated), U/S (understated), and NO (no effect). Also, give the amount of the effect. Ignore income tax implications.

a. On December 15, Year 8, Forgetful Corporation received a \(\$ 1,400\) advance from a customer for products to be manufactured and delivered in January, Year 9. The firm recorded the advance by debiting Cash and crediting Sales Revenue and has made no adjusting entry as of December 31, Year 8.

b. On July 1, Year 8, Forgetful Corporation acquired a machine for \(\$ 5,000\) and recorded the acquisition by debiting Cost of Goods Sold and crediting Cash. The machine has a five-year useful life and zero estimated salvage value.

c. On November 1, Year 8, Forgetful Corporation received a \(\$ 2,000\) note receivable from a customer in settlement of an accounts receivable. It debited Notes Receivable and credited Accounts Receivable on receipt of the note. The note is a sixmonth note due April 30, Year 9, and bears interest at an annual rate of 12 percent. Forgetful Corporation made no other entries related to this note during Year 8.

d. Forgetful Corporation paid its annual insurance premium of \(\$ 1,200\) on October 1, Year 8, the first day of the year of coverage. It debited Prepaid Insurance \(\$ 900\), debited Insurance Expense \(\$ 300\), and credited Cash for \(\$ 1,200\). It made no other entries related to this insurance during Year 8.

e. The Board of Directors of Forgetful Corporation declared a dividend of \(\$ 1,500\) on December 31, Year 8. The dividend will be paid on January 15, Year 9. Forgetful Corporation neglected to record the dividend declaration.

f. On December 1, Year 8, Forgetful Corporation purchased a machine on account for \(\$ 50,000\), debiting Machinery and crediting Accounts Payable for \(\$ 50,000\). Ten days later, the account was paid, and the company took the allowed 2 percent discount. Cash was credited \(\$ 49,000\), Miscellaneous Revenue was credited \(\$ 1,000\), and Accounts Payable was debited \(\$ 50,000\). It is the policy of Forgetful Corporation to record cash discounts taken as a reduction in the cost of assets. On December 28, Year 8, the machine was installed for \(\$ 4,000\) in cash; Maintenance Expense was debited and Cash was credited for \(\$ 4,000\). The machine started operation on January 1, Year 9 . Since the machine was not placed into operation until January 1, Year 9 , as appropriate, no depreciation expense was recorded for Year 8.

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