ABC Company which published several magazines is preparing its financial statements for the year ending December 31, Y1. The new accountant has discovered that an error has been made during the year.

A 36-month subscription to a magazine was sold in August Y1 for $360. The first magazine was to be mailed on September 1, Y1, and on the first of each month for 35 additional months. In August Y1, ABC credited a revenue account for $360 when payment was received. No adjusting or correcting entry was made on December 31, Y1 or December 31, Y2.

Tasks

How does this error affect ABC’s Y1 Net Income?

How does this error affect ABC’s Y2 Net Income?

How does this error affect ABC’s Y1 Total Liabilities balance?

How does this error affect ABC’s Y2 Total Liabilities balance?

Show how this error affects the components of the accounting equation for Y1 and Y2. In other words, prove that the effect of the error affects both sides of the accounting equation (assets = liabilities + equity) equally.