Error analysis

Early in 2018 company was acquired by a new owner who discovered error in the accounting records. The new owner would like you to analyze the error described and the determine the impact on the different accounting item listed. Each error should be analyzed separately. Be sure to indicate the $ amount and whether or not error caused the item to be overstated (OS) or understated (US) or no effect (NE)

1. Vacation pay earned in 2017 of $31,100 was not accrued in 2017. The vacation pay was paid early in 2018 and expensed when paid.

Analysis:

Net income for the period ending 12/31/2017

Retained earnings as of 12/31/2017

Working capital as of 12/31/2017

Net income for the period ending 12/31/2018

Retained earnings as of 12/31/2018

2. December 31, 2017 ending inventory was overstated by $50,000

Analysis

Net income for the period ending 12/31/2017

Retained earnings as of 12/31/2017

Working capital as of 12/31/2018

Net income for the period ending 12/31/2018

Retained earnings as of 12/31/2018

3. at the beginning of 2017 a machine was purchased for a total cost $50,000 the machine had no salvage value and has a life of 5 years. The bookkeeper accidentally expensed the entire cost of the machine in 2017. Company normally uses straight line depreciation

Analysis:

Net income for the period ending 12/31/2017

Retained earnings as of 12/31/2017

Working capital as of 12/31/2017

Net income for the period ending 12/31/2018

Retained earnings as of 12/31/2018

4. at the end of 2017, $30,000 of cash collected in advance for future services was included in service revenue for the period ending 12/31/2017. The services will be performed equally in 2018 and 2019

Analysis:

Net income for the period ending 12/31/2017

Retained earnings as of 12/31/2017

Working capital as of 12/31/2017

Net income for the period ending 12/31/2018

Retained earnings as of 12/31/2018