Question

The Dirk Company fails to record these journal entries:

Accrued revenue	$65
Payment of previously declared dividend	$35
Expiration of prepaid rent	$28

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.)

1. Net Income
2. Total Liabilities
3. Total Assets
4. Retained Earnings

Answer 1

Solution:
	Calculation of Changes in net income and retained Earnings
	INCOME STATEMENT
	Accrued Revenue - Transferred to Revenue Account	$                             65
	Less: Expiration of prepaid rent is transferred to rent expenses	$                             28
	Net Income Transferred to Retained Earnings	$                             37
	Retained Earnings
	Amount transferred from income statement	$                             37
	Less: Payment of Dividend	$                              -
	Net impact on Retained Earnings	$                             37
	Note: Retained Earnings is debited at the time of declaration of dividend so no
	impact on payment of dividend.
	Payment of Dividend will impact the cash account or current assets.
Answer =
	Net income understated $ 37
	Total Liabilities overhstated with $ 65
	Total Assets understated( $28 + $ 35) = with $ 63
	Retained Earnings Overstated with $ 37