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Chapter 22: 22-8BE (page 1307)

Indicate the effect鈥擴nderstate, Overstate, No Effect鈥攖hat each of the following errors has on 2017 net income and 2018 net income. 2017 2018 (a) Equipment (with a useful life of 5 years) was purchased and expensed in 2015. (b) Wages payable were not recorded at 12/31/17. (c) Equipment purchased in 2017 was expensed. (d) 2017 ending inventory was overstated. (e) Patent amortization was not recorded in 2018.

Short Answer

Expert verified

Net income is computed after deducting all expenses from revenues. The effects of errors on net income are stated in step 2 below.

Step by step solution

01

Definition of net income

The net income is the income generated by the business organization after deducting all the expenses from the revenues of the business.

02

Effect of the errors

  1. 2017 Overstated; 2018 Overstated
  2. 2017 Overstated; 2018 Understated
  3. 2017 Understated; 2018 Overstated
  4. 2017 Overstated; 2018 Understated
  5. 2017 No effect; 2018 Overstated

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Most popular questions from this chapter

If a company registered with the SEC justifies a change in accounting method as preferable under the circumstances, and the circumstances change, can that company switch back to its prior method of accounting before the change? Why or why not?

Lenexa State Bank has followed the practice of capitalizing certain marketing costs and amortizing these costs over their expected life. In the current year, the bank determined that the future benefits from these costs were doubtful. Consequently, the bank adopted the policy of expensing these costs as incurred. How should the bank report this accounting change in the comparative financial statements?
  1. On January 1, 2014, Jackson Company purchased a building and equipment that have the following useful lives, salvage values, and costs. Building, 40-year estimated useful life, \(50,000 salvage value, \)800,000 cost Equipment, 12-year estimated useful life, \(10,000 salvage value, \)100,000 cost The building has been depreciated under the double-declining-balance method through 2017. In 2018, the company decided to switch to the straight-line method of depreciation. Jackson also decided to change the total useful life of the equipment to 9 years, with a salvage value of $5,000 at the end of that time. The equipment is depreciated using the straight-line method.
  2. Instructions (a) Prepare the journal entry(ies) necessary to record the depreciation expense on the building in 2018.
  3. (b) Compute depreciation expense on the equipment for 2018.

Equipment was purchased on January 2, 2017, for $24,000, but no portion of the cost has been charged to depreciation. The corporation wishes to use the straight-line method for these assets, which have been estimated to have a life of 10 years and no salvage value. What effect does this error have on net income in 2017? What entry is necessary to correct for this error, assuming that the books are not closed for 2017?

Presented below are the comparative income and retained earnings statements for Denise Habbe Inc. for the years 2017 and 2018.

2018 2017 Sales \(340,000 \)270,000 Cost of sales 200,000 142,000 Gross profit 140,000 128,000 Expenses 88,000 50,000 Net income \( 52,000 \) 78,000 Retained earnings (Jan. 1) \(125,000 \) 72,000 Net income 52,000 78,000 Dividends (30,000) (25,000) Retained earnings (Dec. 31) \(147,000 \)125,000

The following additional information is provided: 1. In 2018, Denise Habbe Inc. decided to switch its depreciation method from sum-of-the-years鈥� digits to the straight-line method. The assets were purchased at the beginning of 2017 for \(100,000 with an estimated useful life of 4 years and no salvage value. (The 2018 income statement contains depreciation expense of \)30,000 on the assets purchased at the beginning of 2017.) 2. In 2018, the company discovered that the ending inventory for 2017 was overstated by $24,000; ending inventory for 2018 is correctly stated.

Instructions Prepare the revised retained earnings statement for 2017 and 2018, assuming comparative statements. (Ignore income taxes.)
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