Question

1.Daniel incorrectly recorded an AJE for interest on a note receivable instead of the correct AJE for interest on a note payable. The interest won’t be paid by Daniel until next year.

2.Instead of recording the purchase return of inventory to satisfy its liability, Daniel incorrectly recorded the transaction as the payment of cash to satisfy a liability from an earlier purchase of inventory. The periodic inventory system is used and the inventory was not included in Alpha’s ending inventory.

3.Daniel paid cash for one year of rent in the third month of the year but incorrectly recorded it as cash paid to satisfy an account payable. Daniel also failed to record the required AJE for the rent used during the year.

Please tell How Assets, Liabilites, Stockholder equity is effected, Overstated, Understated, or Neither

Answer 1

1)In the given ques. following effect of error has made:

• Profit of the year is overstated by interest amount.
• By increasing profit, Reserve&surplus would also increase which results in increase of shareholder's equity.
• Liability of the year is understated by interest amount.
• Correct AJE is:Statement of Profit&loss Dr. To Interest payable a/c (Being Interest expense is recognised is SPL)

2)In given Ques. Daniel has incorrectly recorded the Purchase return transaction as the payment of cash to satisfy the liability.Following effect has made by wrong treatment:

• Payable's stated at correct figure as debited.
• Assets are reduces in form of cash by payment.
• Inventory are stated at correct figure by not included in closing inventory.
• Correct AJE of Purchase return is: Payable a/c Dr. To Purchase return a/c (Being Purchase return recorded)

3)In the given ques. following effect of error is:

• Liabilities is understated by payment amount.
• Profit of the year is overstated.
• Correct AJE is: Statement of profit&loss a/c To Rent payable a/c (Being Rent amount due)
• Rent payable a/c Dr. To Cash (Being cash paid for rent)