Question

The Mace Company fails to record these Journal Entries Accrued Expense $40 Cash paid to purchase Prepaid Insurance $30 Required: Determine the net effect of these errors on the following items. Indicate the dollar amount of the error and the direction of the error. (Example: $17 overstated, or $12 understated, or NO ERROR)

a) Net Income $_______________

b) Total Liabilities $_______________

c) Total Assets $_______________

d) Retained Earnings $_______________

Answer 1

Entry	Accrued expense Dr	Prepaid insurance a/c Dr
	To outstanding expenses a/c	To cash a/c
Particulars	Accrued expense 40$	Cash paid to purchase Prepaid insurance 30$
a) Net liabilities = Total liabilities- cash and cash equivalents	40$ understated. If the entry is passed accrued expense will be debited and outstanding expenses (liabilities) will be credited. Since, it is not recorded there is an understatement of lnet laibilities	30$ understated since the cash of 30$ paid will also be deducted from total liabilities to get net liabilites
B) Total liabilities	40$ understated. If the entry is passed accrued expense will be debited and outstanding expenses (liabilities) will be credited. Since, it is not recorded there is an understatement of lnet laibilities	No error
c) Total assets	No error	No error. The understatement of Preapid expense is offset by overstatement of cash
d) Retained earnings	40$ overstated. Since, the expenses of 40$ are not reduced	No error. This is not actual expense and no way related to P&L and retained earnings