CP5-6 (Static) Making a Decision as an Auditor: Effects of Errors on Income, Assets, and Liabilities LO-5-1, 5-3

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Megan Company (not a corporation) was careless about its financial records during its first year of operations, 2017. It is December 31, 2017, 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.

Analyze each error and indicate its effect on 2017 and 2018 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. The first transaction is used as an example.

Independent Errors		Effect On
		Net Income		Assets		Liabilities
		2017	2018	2017	2018	2017	2018
1.	Depreciation expense for 2017, not recorded in 2017, $950.	O	NE	O	O	NE	NE
		$950		$950	$950

Following is a sample explanation of the first error:

Failure to record depreciation in 2017 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.

CP5-6 Part 5

6. Sale of services and cash collected in 2017. Recorded as a debit to Cash and as a credit to Accounts Receivable, $300. (Enter all values as positive values.)

			Effect on
Errors	Net Income	Net Income	Assets	Assets	Liabilities	Liabilities
	2017	2018	2017	2018	2017	2018
4.