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. Write an explanation of your analysis of each transaction to support your response. The first transaction is used as an example.

Following is a sample explanation of the first error:
Failure to record depreciation in the current year caused depreciation expense to be too low; therefore, net income was overstated by $950. Accumulated depreciation also is too low by $950, which causes assets to be overstated by $950 until the error is corrected.

Transcribed Image Text:

Independent Errors 1. Depreciation expense for the current year not recorded in the current year, $950. 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. 3. Revenue earned during the current year but not collected or recorded until the next year, $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. 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. 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. Effect on Assets Net Income Current Next Current Next Current Year Year Year Year Year NE 0 $950 0 $950 O NE Liabilities $950 Next Year NE