Effect of recording errors on financial statements, Forgetful Co


Question Description:

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Effect of recording errors on financial statements, Forgetful Corporation (Forgetful) neglected to make various adjusting entries on December 31, 2008, the end of its accounting period. Forgetful applies U.S. GAAP, and reports in U.S. dollars. Indicate the effects on assets, liabilities, and shareholders’ equity on December 31, 2008, of failing to adjust for the following independent items as appropriate, using the notations O/S (overstated), U/S (understated), and NO (no effect). Also, give the amount of the effect. Ignore income tax implications a. On December 15, 2008, Forgetful Corporation received a $1,400 advance from a customer for products to be manufactured and delivered in January. 2009. The firm recorded the advance by debiting Cash and crediting Sales Revenue and made no adjusting entry as of December 31. 2008. b. On July 1, 2008, 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, 2008. Forgetful Corporation received a $2,000 note receivable from a customer in settlement of an account receivable. It debited Notes Receivable and credited Accounts Receivable on receipt of the note. The note is a six-month note due April 30, 2009, and bears interest at an annual rate of 12%. Forgetful Corporation made no other entries related to this note during 2008. d. Forgetful Corporation paid its annual insurance premium of $1,200 on October 1, 2008, 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 2008. e. The Board of Directors of Forgetful Corporation declared a dividend of $1,500 on December 31, 2008. The dividend will be paid on January 15, 2009. Forgetful Corporation neglected to record the dividend declaration. f. On December 1, 2008. Forgetful Corporation purchased a machine on account for $50,000, debiting Machinery and crediting Accounts Payable for $50,000. Ten days later the company paid the account and took the allowed % discount. It credited Cash $49,000 and Miscellaneous Revenue $1.000. It debited Accounts Payable $50,000. Forgetful Corporation normally records cash discounts taken as a reduction in the cost of assets. On December 28, 2008, the firm paid $4.000 cash to employees to install the machine; it debited Maintenance Expense and credited Cash for $4,000. The machine started operation on January 1, 2009. Since the firm did not place the machine into operation until January 1, 2009, it correctly recorded no depreciation for 2008.

Answer

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