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State the effect of each of the following errors made in 2014 on the balance sheets...

State the effect of each of the following errors made in 2014 on the balance sheets and the income statements prepared in 2014 and 2015. (a) The ending inventory is understated as a result of an error in the count of goods on hand. (b) The ending inventory is overstated as a result of the inclusion of goods acquired and held on a consignment basis. No purchase was recorded on the books. (c) A purchase of merchandise at the end of 2014 is not recorded until payment is made for the goods in 2015; the goods purchased were included in the inventory at the end of 2014. (d) A sale of merchandise at the end of 2014 is not recorded until cash is received for the goods in 2015; the goods sold were excluded from the inventory at the end of 2014. (e) Goods shipped to consignees in 2014 were reported as sales; goods in the hands of consignees at the end of 2014 were not recognized for inventory purposes; sale of such goods in 2015 and collections on such sales were recorded as credits to the receivables established with consignees in 2014. (f) The total of one week’s sales during 2014 was credited to Gain on Sale—Machinery. (g) No depreciation is taken in 2014 for equipment sold in April 2014. The company reports on a calendar-year basis and computes depreciation to the nearest month. (h) No depreciation is taken in 2014 for equipment purchased in October 2014. The company reports on a calendar-year basis and computes depreciation to the nearest month. (i) Customer notes receivable are debited to the accounts receivable account.

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Expert Solution

S.No Situation Balance Sheet Income Statement 2014 Income Statement 2015
a The ending inventory is understated as a result of an error in the count of goods on hand. Total assets and profit/reserves are understated. Income understated due to higher COGS as closing inventory is understated. Income understated due to lower COGS as opening inventory is understated.
b The ending inventory is overstated as a result of the inclusion of goods acquired and held on a consignment basis. No purchase was recorded on the books. Total assets and profit/reserves are overstated. Income understated due to lower COGS as opening inventory is understated. Income understated due to higher COGS as closing inventory is understated.
c A purchase of merchandise at the end of 2014 is not recorded until payment is made for the goods in 2015; the goods purchased were included in the inventory at the end of 2014. Creditors are understated and profit/reserves are overstated. Income understated due to lower COGS as purchase expenses not recorded. Income overstated due to higher COGS as purchase expenses recorded for previous year.
d A sale of merchandise at the end of 2014 is not recorded until cash is received for the goods in 2015; the goods sold were excluded from the inventory at the end of 2014. Debtors are understated and profit/reserves are understated. Income understated due to lower COGS as sales not recorded. Income overstated due to higher COGS as sales recorded for previous year.

ekkarill92 answered 1 year ago
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