Chapter_4_review_question-_effects_of_errors_on_A_L_and_SE_Question_only_V2

Chapter_4_review_question-_effects_of_errors_on_A_L_and_SE_Question_only_V2

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Question The accountant of ABC Company was careless in preparing the December 31, 2011 financial statement. The president would like to know the impact of the net income and financial position for 2011 and 2012 and how this is going to affect the bank covenant’s debt to equity ratio of 2:1. Independent Errors Net Income Assets Liabilities Shareholders’ Equity 2011 2012 2011 2012 2011 2012 2011 2012 (1) Machinery was purchased for $40,000 on August 1 st , 2011. The useful life was estimated to be 10 years with a $4,000 residual value. Amortization expense was first recorded in 2012. (2) Salaries for employees of $30,000 are paid weekly on Friday. The last pay day was Friday, December 27
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Unformatted text preview: th . For ease of recording, the January 3 rd , 2012 salaries was recorded as salaries expense. (3) Revenue earned of $2,500 during 2011 was not collected or recorded until January 13 th , 2012 (4) Advertising expense of $10,000 paid in December 20 th , 2011 was recorded as an expense even though the advertisement does not start until January 2012 (5) $1,900 cash collected on account in 2011 was mistakenly recorded as revenue. (6) Sales of services for cash in 2011 was mistakenly recorded as a debit to cash and as a credit to accounts payable, $300 (7) On December 31, 2011, bought a 2 year insurance policy for $8,000 was recorded as insurance expense Total Effect...
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