Analysis of Errors
State the effect of each of the following errors made in 2007 on the balance sheets and the income statements prepared in 2007 and 2008.
(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 2007 is not recorded until payment is made for the goods in 2008; the goods purchased were included in the inventory at the end of 2007.
(d) A sale of merchandise at the end of 2007 is not recorded until cash is received for the goods in 2008; the goods sold were excluded from the inventory at the end of 2007.
(e) Goods shipped to consignees in 2007 were reported as sales; goods in the hands of consignees at the end of 2007 were not recognized for inventory purposes; sale of such goods in 2008 and collections on such sales were recorded as credits to the receivables established with consignees in 2007.
(f) The total of one week’s sales during 2007 was credited to Gain on Sale—Machinery.
(g) No depreciation is taken in 2007 for equipment sold in April 2007. The company reports on a calendar year basis and computes depreciation to the nearest month.
(h) No depreciation is taken in 2007 for equipment purchased in October 2007. 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.