Using the notation O/S (overstated), U/S (understated), or No (no effect), indicate the effects on assets, liabilities, and shareholders’ equity of failing to record or recording incorrectly each of the following transactions or events. For example, a failure to record the issuance of common stock for $10,000 cash would be shown as follows:
■ Assets—U/S $10,000
■ Liabilities—No
■ Shareholders’ equity—U/S $10,000
(1) A firm ordered $23,000 of merchandise from a supplier but did not record anything in its accounts.
(2) The firm received the merchandise in transaction (1) and recorded it by debiting Merchandise Inventory and crediting Accounts Payable for $32,000.
(3) The firm acquired an automobile costing $20,000 by paying $2,000 in cash and signing a note payable for the remainder of the purchase price. It recorded the acquisition by debiting Automobile for $20,000, crediting Cash for $18,000, and crediting Note Payable for $2,000.
(4) The firm paid the $1,800 annual insurance premium on the automobile in transaction
(3) by debiting Automobile and crediting Cash for $1,800. The insurance period begins next month.
(5) The firm received an order from a customer for $5,500 of merchandise that the firm will deliver next month. The customer included a check for $1,500. The firm made no entry for this transaction.
(6) The firm issued 2,000 shares of its $10 par value common stock having a market value of $32,000 in exchange for land. It recorded the transaction by debiting Land and crediting Common Stock for $20,000.
(7) The firm signed a three-year employment agreement with its chief executive officer at an annual salary of $275,000. The employment period begins next month. The firm did not record anything in its accounts related to this agreement.