Question

The following income statement was prepared for Frame Supplies for Year 1:

FRAME SUPPLIES
Income Statement
For the Year Ended December 31, Year 1
Sales	$	76,550
Cost of goods sold		(36,830	)
Gross margin		39,720
Operating expenses		(9,240	)
Net income	$	30,480

During the year-end audit, the following errors were discovered:

1. A $1,574 payment for repairs was erroneously charged to the Cost of Goods Sold account. (Assume that the perpetual inventory system is used.)
2. Sales to customers for $2,690 at December 31, Year 1, were not recorded in the books for Year 1. Also, the $1,146 cost of goods sold was not recorded.
3. A mathematical error was made in determining ending inventory. Ending inventory was understated by $1,247. (The Inventory account was mistakenly written down to the Cost of Goods Sold account.)

Required
Determine the effect, if any, of each of the errors on the following items. Give the dollar amount of the effect and whether it would overstate (O), understate (U), or not affect (NA) the account. The first item for each error is recorded as an example.
  

Answer 1

Error No 1	Amount of Error	Effect	Remark
Sales Year 1	NA	NA
Ending Inventory Dec 31 Year 1	NA	NA
Gross Margin Year 1	1574	Understate	Due to increase in COGS , Gross margin will decrease
Beginning Inventory Jan 1 Year 2	NA	NA
Cost of Goods Sold Year 1	$1,574	Overstate	Recorded under Cost of Goods Sold Account
Net Income Year 1	NA	NA
Retained Earnings Dec 31 Year 1	NA	NA
Tototal assets Dec 31 Year 1	NA	NA
Error No 2	Amount of Error	Effect	Remark
Sales Year 1	$2,690.00	Understate	Sales not recorded
Ending Inventory Dec 31 Year 1	NA	NA
Gross Margin Year 1	$1,544.00	Understate	Gross margin will showed lower due to not recording of sales & COGS (2690-1146)
Beginning Inventory Jan 1 Year 2	NA	NA
Cost of Goods Sold Year 1	$1,146.00	Overstate	Cost of Goods Sold not recorded
Net Income Year 1	$1,544.00	Understate	Due to Gross margin understated,
Retained Earnings Dec 31 Year 1	$1,544.00	Understate	Due to Net Income understated,
Tototal assets Dec 31 Year 1	NA	NA
Error No 3	Amount of Error	Effect
Sales Year 1	NA	NA
Ending Inventory Dec 31 Year 1	$1,247.00	Understate	Wrong Value of Inventory calculated & considered
Gross Margin Year 1	$1,247.00	Understate	Due to understated of Endng Inventory
Beginning Inventory Jan 1 Year 2	$1,247.00	Understate	Due to understated of Ending Inventory
Cost of Goods Sold Year 1	$1,247.00	Overstate	Inventory Account writtem down to COGS
Net Income Year 1	$1,247.00	Understate	Due to Gross margin understated,
Retained Earnings Dec 31 Year 1	$1,247.00	Understate	Due to Net Income understated,
Tototal assets Dec 31 Year 1	$1,247.00	Understate	Due to understated of Endng Inventory