Bergo Bay's accounting system generated the following account balances on December 31. The companys manager knows something is wrong with this list of balances because it does not show any balance for Work in Process Inventory, and the accrued factory payroll (Factory Wages Payable) has not been recorded.

	Debit	Credit
Cash	$ 170,000
Accounts receivable	75,000
Raw materials inventory	80,000
Work in process inventory	0
Finished goods inventory	15,000
Prepaid rent	3,000
Accounts payable		$ 17,000
Notes payable		25,000
Common stock		50,000
Retained earnings (prior year)		271,000
Sales		373,000
Cost of goods sold	218,000
Factory overhead	115,000
General and administrative expenses	60,000
Totals	$ 736,000	$ 736,000

These six documents must be processed to bring the accounting records up to date.

Materials requisition 10:	$ 10,200	direct materials to Job 402
Materials requisition 11:	$ 18,600	direct materials to Job 404
Materials requisition 12:	$ 5,600	indirect materials
Labor time ticket 52:	$ 36,000	direct labor to Job 402
Labor time ticket 53:	$ 23,800	direct labor to Job 404
Labor time ticket 54:	$ 8,200	indirect labor

Jobs 402 and 404 are the only jobs in process at year-end. The predetermined overhead rate is 200% of direct labor cost.

1. Prepare an income statement for the year and a balance sheet as of December 31. Hint: Retained earnings is $356,800 at the end of the current year.
2. Assume that the $5,600 on materials requisition 12 should have been direct materials charged to Job 404. Does this error result in overstatement or understatement of total assets?