1. On December 31, 20x6, Reyes Ltd. failed to accrue office supplies expense of

$1,800. In January 20x7, when it received the bill from its supplier, Reyes made

the following entry:

Office supplies expense 2,400

Cash 2,400

2. On the last day of 20x6, Station 126 Holdings received a $120,000 prepayment

from a tenant for 20x7 rent of a building. Station 126 Holdings recorded the

receipt as rent revenue.

3. At the end of 20x6, Marwani-Strickland Corporation failed to accrue interest of

$10,000 on a note receivable. At the beginning of 20x7, when the company

received the cash, it was recorded as interest revenue.

Required - For each error:

(a) What would the effect of each error be on the income statement and the balance

sheet in the 20x6 financial statements? Set up your solution as a table:

Item 1

Income Statement	Balance Sheet
Which line item is understated or overstated	Which line item is understated or overstated
Net Income is understated or overstated?	Retained Earnings is understated or overstated?

(b) Prepare any journal entries each company should record in 20x7 to correct the

errors. Assume a tax rate of 25%.