Question : 110. Forgetful Corporation neglected to make various adjusting entries December 31, : 1230548

110. Forgetful Corporation neglected to make various adjusting entries on December 31, Year 8. Indicate the effects on assets, liabilities, and shareholders’ equity on December 31, Year 8 of failing to adjust for the following independent items as appropriate, using the notation O/S (overstated), U/S (understated), and No (no effect). Also, give the amount of the effect. Ignore income tax implications. Use the following format: 

Effect of Errors or Omissions on December 31, Year 8 Balance Sheet

Assets

Liabilities

Shareholders’ Equity

Item

Direction

Amount

Direction

Amount

Direction

Amount

a.

On December 15, Year 8, Forgetful Corporation received a $1,400 advance from a customer for products to be manufactured and delivered in January, Year 9. The firm recorded the advance by debiting Cash and crediting Sales Revenue and has made no adjusting entry as of December 31, Year 8.

b.

On July 1, Year 8, Forgetful Corporation acquired a machine for $5,000 and recorded the acquisition by debiting Cost of Goods Sold and crediting Cash. The machine has a five-year useful life and zero estimated salvage value.

c.

On November 1, Year 8, Forgetful Corporation received a $2,000 note receivable from a customer in settlement of an accounts receivable. It debited Notes Receivable and credited Accounts Receivable upon receipt of the note. The note is a six-month note due April 30, Year 9 and bears interest at an annual rate of 12 percent. Forgetful Corporation made no other entries related to this note during Year 8.

d.

Forgetful Corporation paid its annual insurance premium of $1,200 on October 1, Year 8, the first day of the year of coverage. It debited Prepaid Insurance $900, debited Insurance Expense $300, and credited Cash for $1,200. It made no other entries related to this insurance during Year 8.

e.

The Board of Directors of Forgetful Corporation declared a dividend of $1,500 on December 31, Year 8. The dividend will be paid on January 15, Year 9. Forgetful Corporation neglected to record the dividend declaration.

f.

On December 1, Year 8, Forgetful Corporation purchased a machine on account for $50,000, debiting Machinery and crediting Accounts Payable for $50,000. Ten days later, the account was paid and the company took the allowed 2 percent discount. Cash was credited $49,000, Miscellaneous Revenue was credited $1,000, and Accounts Payable was debited $50,000. It is the policy of Forgetful Corporation to record cash discounts taken as a reduction in the cost of assets. On December 28, Year 8, the machine was installed for $4,000 in cash; Maintenance Expense was debited and Cash was credited for $4,000. The machine started operation on January 1, Year 9. As the machine was not placed into operation until January 1, Year 9, as appropriate, no depreciation expense was recorded for Year 8.

111. Entries for the following items were either omitted or recorded incorrectly in preparing the financial statements for Year 4. Indicate the amount and nature [understatement (U), overstatement (O), no effect (N)] of the effect of the omission on total assets, total liabilities, and net income for Year 4. Ignore income tax effects. Use the following format: 

Total Assets

Total Liabilities

Net Income

a.

The company received a payment of $4,600 from a customer for an order that the company has not yet produced. It credited the $4,600 to sales revenue.

b.

The company failed to record a dividend of $5,000 that was declared but not yet paid.

c.

The company repaid a loan of $5,000 to the bank. It recorded the transaction in the appropriate accounts but in the amount of $50,000. The company has accounted for all interest on the loan correctly.

d.

The ending balance of finished goods inventory was incorrectly recorded at $4,000 more than its proper balance due to a mistake in taking a physical inventory.

e.

The company correctly entered a stock issue of $22,000 on December 31, Year 4, in the cash account but mistakenly credited it to Bonds Payable.

f.

On the basis of an incorrect report from the company’s credit collection agency, specific accounts receivable of $2,700 were written off, but are actually expected to be collectible accounts. The company correctly made a provision for estimated uncollectible accounts for year 4.