Error Analysis
In early 2007, while reviewing Huffman Inc.’s 2006 financial records, the accountant discovered several errors. For each of the following errors, indicate the effect on net income (i.e., understatement, overstatement, or no effect) for both 2006 and 2007, assuming that no correction had been made and the company uses a periodic system for inventory.
(a) Certain items of ending inventory were accidentally not counted at the end of 2006.
(b) Machinery was sold in May 2006, but the company continued to deduct depreciation for the remainder of 2006, although the asset was removed from the books in May.
(c) The 2006 year end purchases of inventory were not recorded until the beginning of 2007, although the inventory was correctly counted at the end of 2006.
(d) Goods sold on account in 2006 were not recorded as sales until 2007.
(e) Insurance costs incurred but unpaid in 2006 were not recorded until paid in 2007.
(f) Interest revenue in 2006 was not recorded until 2007.
(g) The 2006 year end purchases were not recorded until the beginning of 2007. The inventory associated with these purchases was omitted from the ending inventory count in 2006.
(h) A check for January 2007 rent was received and recorded as revenue at the end of 2006.
(i) Interest accrued in 2006 on a note payable was not recorded until it was paid in 2007.