When the records of Debra Hanson Corporation were reviewed at the close of 2018,
ID: 2590972 • Letter: W
Question
When the records of Debra Hanson Corporation were reviewed at the close of 2018, the following errors were discovered. For each item, indicate by a check mark in the appropriate column whether the error resulted in an overstatement, an understatement, or had no effect on net income for the years 2017 and 2018.
2017
2018
Item
Overstatement
Understatement
No Effect
Overstatement
Understatemen
No Effect
2017
2018
Item
Overstatement
Understatement
No Effect
Overstatement
Understatemen
No Effect
1. Failure to record amortization of patent in 2018.X
X
X
X
X
X
2. Failure to record the correct amount of ending 2017 inventory. The amount was understated because of an error in calculation.X
X
X
X
X
X
3. Failure to record merchandise purchased in 2017. Merchandise was also omitted from ending inventory in 2017 but was not yet sold.X
X
X
X
X
X
4. Failure to record accrued interest on notes payable in 2017; that amount was recorded when paid in 2018.X
X
X
X
X
X
5. Failure to reflect supplies on hand on balance sheet at end of 2017.Explanation / Answer
Debra Hanson Corporation
Debra Hanson Corp
2017
2018
Item
Overstatement
Understatement
No Effect
Overstatement
Understatement
No Effect
1. Failure to record amortization of patent in 2018
x
x
2. Failure to record the correct amount of ending 2017 inventory. The amount was understated because of an error in calculation.
x
x
3.Failure to record merchandise purchased in 2017. Merchandise was also omitted from ending inventory in 2017 but was not yet sold.
x
x
4. Failure to record accrued interest on notes payable in 2017. That amount was recorded when paid in 2018.
x
x
5. Failure to reflect supplies on hand on balance sheet at end of 2017
x
x
Explanation:
the error is committed in 2018 and hence no effect on the income in 2017. As regards the income in 2018, the event overstates the net income in 2018 to the extent of the amount of unrecorded amortization. Since amortization is an expense that is written off against the annual income.
The error would increase cost of goods sold and understate the net income. Since, the ending inventory erroneously recorded, the net income of 2018is overstated.
Since the merchandise purchased is omitted in both inventory and Cost of goods sold, the event has no effect on net income of 2017, consequently the net income of 2018 is also not affected.
The income statement would be overstated. Accrued interest for 2017 has to be written off against the Year’s net income and the same does not form part of the income statement of 2018. Hence, accrued interest on notes payable understates the net income of 2018.
The income statement would be understated since the supplies expense is affected by not recording the supplies on hand. The income for 2017 is understated, while the income for 2018 is overstated to the extent the supplies on hand has not been recorded.
Debra Hanson Corp
2017
2018
Item
Overstatement
Understatement
No Effect
Overstatement
Understatement
No Effect
1. Failure to record amortization of patent in 2018
x
x
2. Failure to record the correct amount of ending 2017 inventory. The amount was understated because of an error in calculation.
x
x
3.Failure to record merchandise purchased in 2017. Merchandise was also omitted from ending inventory in 2017 but was not yet sold.
x
x
4. Failure to record accrued interest on notes payable in 2017. That amount was recorded when paid in 2018.
x
x
5. Failure to reflect supplies on hand on balance sheet at end of 2017
x
x
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