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Early in 2020, Free Company was acquired by a new owner who discovered errors in the accounting records. The new owner would like you to analyze the error described and then determine the impact on the different accounting items listed. Each error should be analyzed separately. Be sure to indicate the $ amount and whether or not the error caused the items to be overstated (S) or understated (US) or No Effect (NE).

December 31, 2020, ending inventory was understated by $300,000.

Analysis:

Net Income for the period ending 12/31/2020 __________________________________________

Retained Earnings as of 12/31/2020. __________________________________________

Working Capital as of 12/31/2020 __________________________________________

Net Income for the period ending 12/31/2021. __________________________________________

Retained Earnings as of 12/31/2021. __________________________________________

Working Capital as of 12/31/2021 __________________________________________

2- For the year ended 12/31/2020, depreciation expense was overstated by $45,000.

Analysis:

Net Income for the period ending 12/31/2020 __________________________________________

Retained Earnings as of 12/31/2020 __________________________________________

Working Capital as of 12/31/2020 __________________________________________

Net Income for the period ending 12/31/2021 __________________________________________

Retained Earnings as of 12/31/2021 __________________________________________

Working Capital as of 12/31/2021 __________________________________________

3- At the end of 2020, $60,000 of cash was collected for current services and future services, The entire amount was included in Service Revenue for the period ending 12/31/2020. The $60,000 of services will be performed and earned equally over the years 2020, 2021 and 2022.

Analysis:

Net Income for the period ending 12/31/2020 __________________________________________

Retained Earnings as of 12/31/2020 __________________________________________

Working Capital as of 12/31/2020 __________________________________________

Net income for the period ending 12/31/2021 __________________________________________

Retained Earnings as of 12/31/2021 __________________________________________

Working Capital as of 12/31/2021 __________________________________________

Free Company has sold $2,000,000 of new equipment in 2020 with a one ear warranty. It is estimated that a warranty liability of S20.000 exists at 12/31/2020. but no warranty liability has been recorded since claims will not occur until 2021

Assume that $20.000 of claims were made in 2021 and expensed in 2021

Analysis:

Net Income for the period ending 12/31/2020 __________________________________________

Retained Earnings as of 12/31/2020 __________________________________________

Working Capital as of 12/31/2020 __________________________________________

Net Income for the period ending 12/31/2021 __________________________________________

Retained Earnings as of 12/31/2021. __________________________________________

Working Capital as of 12/31/2021 __________________________________________