Question

During 2012 the company discovered the following accounting errors 1- the machine has been mistakenly depreciated based on 5 years instead of 6 years. In July 1 2009, XYZ corporation Acquired an equipment on July 1 2009 at cost of $16000 the estimated useful life for the machine 6 years and the residual value $1000. Company use SLM for depreciation. 2- Ending inventory for year 2009 was overstated by $ 1800 3- Ending inventory for year 2010 was understated by $2000 Company subject to income tax rate 40%. Show the dollar amount of the combined effect, if any, and the nature of the effect (overstatement or understatement or correct) of these accounting errors on the reporting value of the following financial statement items as in the following table:

F S items the combined impact on reporting value of FS items NI 2009 Total Assets Dec. 31 2010 Owners Equity Dec. 31 2010 Total Liabilities

F S items	the combined impact on reporting value of FS items
NI 2009
Total Assets Dec. 31 2010
Owners Equity Dec. 31 2010
Total Liabilities

Answer 1

FS Item		Combined Impact
Net Income 2009
Excess Depreciation	-250
Overstatement of Cost of good sold	1800	1550
Total Assets 2010
Inventory	2000
Machine	750	2750
Owner Equity 2010		170
Impact on reserve net of tax
(550-380)
Total Liability
Tax liability	180	180

Error -1
Date of Acquisition	July 1 2019
Useful life	6 years
Salvage Value	1000
Cost	16000
		Depreciation for 2009	Depreciation for 2010
Depreciation at 5 years useful life as on dec, 2009	(16000-1000)/5 x 6/12	1500	3000
Depreciation at 6 years useful life as on dec, 2009	(16000-1000)/6 x 6/12	1250	2500
Understatement Effect on NI 2009		250	500
Tax Effect		100	200
Error -2
		Tax Impact
Ending Inventory of 2009 overstated	1800	-720
When an ending inventory overstatement occurs, the cost of goods sold is stated too low, which means that net income before taxes is overstated by the amount of the inventory overstatement.
Ending Inventory of 2010 understated	2000	800
When an ending inventory understatement occurs, the cost of goods sold is stated too high, which means that net income before taxes is understated by the amount of the inventory overstatement.