Effects of Errors on Financial Statements The accountant for Hallmark Medical Co

Question

Effects of Errors on Financial Statements

The accountant for Hallmark Medical Co., a medical services consulting firm, mistakenly omitted adjusting entries for (a) unearned revenue earned during the year ($20,350) and (b) accrued wages ($8,390).

Indicate the effect of each error, considered individually, on the income statement for the current year ended May 31. Also indicate the effect of each error on the May 31 balance sheet.

Enter all amounts as positive numbers. Enter "0" in those spaces where there is no overstatement or no understatement.

Error (a) The adjusting entry for unearned revenue earned during the year ($20,350) was omitted.

Error (b) The adjusting entry for accrued wages ($8,390) was omitted.

Overstated Understated 1. Revenue for the year would be $______ $______ 2. Expenses for the year would be $______ $______ 3. Net income for the year would be $______ $______ 4. Assets at May 31 would be $______ $______ 5. Liabilities at May 31 would be $______ $______ 6. Stockholders' equity at May 31 would be $______ $______

Explanation / Answer

Since the revenue is unearned, it will not affect the revenue and net income. However, unearned revenue (received cash in advance) increase the cash balance and also increases short term liabilities. So both assets and liabilities increases as result of unearned revenue. Since, it is not recorded, both assets and liabilities are understated by 20,350. Others will have no impact.

Accrued wages are the amount of wages payable but not paid yet. If ti was recorded, it would have increase current liabilities and expenses. Since it is omitted, both current liabilities and expenses are understated by 8390. Also as expenses increases, net income decreases, therefore, as a result of this understatement in expenses, net income is overstated by 8390. Others will have no impact.

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