failure to record depreciation in 2010 caused depreciation expense to be too low the 555515

Making a Decision as an Auditor: Effects of Errors on Income, Assets, and Liabilities – Megan Company (not a corporation) was careless about its financial records during its first year of operations, 2010. It is December 31, 2010, the end of the annual accounting period. An outside CPA has examined the records and discovered numerous errors, all of which are described here. Assume that each error is independent of the others.

Required:

Analyze each error and indicate its effect on 2010 and 2011 net income, assets, and liabilities if not corrected. Do not assume any other errors. Use these codes to indicate the effect of each dollar amount: O = overstated, U = understated, and NE = no effect. Write an explanation of your analysis of each transaction to support your response. The first transaction is used as an example.

Following is a sample explanation of the first error:

Failure to record depreciation in 2010 caused depreciation expense to be too low; therefore, income was overstated by $950. Accumulated depreciation also is too low by $950, which causes assets to be overstated by $950 until the error is corrected.