Megan Company (not a corporation) was careless about its financial records during its first year of operations, 2010. It is December 31, 2010, the end of the company's fiscal year. An external auditor examined the records and discovered numerous errors, all of which are described on the following page. Assume that each error is independent of the others.

Required:
Analyze each error and indicate its effect on 2010 and 2011 profit, assets, and liabilities if not corrected. Do not assume any other errors. Use these codes to indicate the effect of each dollar amount: \(\mathrm{O}=\) overstated, \(\mathrm{U}=\) understated, and \(\mathrm{NE}=\) no effect. Write an explanation of your analysis of each transaction to support your response. (The answer for the first item is given as an example.) A sample explanation of analysis of errors that are not corrected is provided below, using the first error as an example:
1. Failure to record depreciation in 2010 caused depreciation expense to be too low; therefore, profit 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 2010, not recorded in 2010, $950. 2. Wages earned by employees during 2010 not recorded in 2010 but will be paid in 2011, $500. 3. Revenue earned during 2010 but not collected or recorded until 2011, S600; will be collected in 2011. 4. Amount paid in 2010 and recorded as expense in 2010, but it is not an expense until 2011, $200. 5. Revenue col ected in 2010 and recorded as revenue in 2010, but it is not earned until 2011, $900. 6. Sale of services for cash in 2010. Recorded as a debil to cash and as a credit to trade receivables, $300. 7. On December 31, 2010, bought land on credit for $8,000, but did not record the transaction until payment was made on February 1, 2011. Effect on Profit Assets. Liabilities 2010 2011 2010 2011 2010 2011 O $950 NE O $950 0 $950 NE NE