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In reviewing the accounts of Tumblers 00, you discovered that a credit of $1,000 to prepaid insurance was wrongly credited to accounts receivable, and an $800 prepayment was remitted for a radio advertisement that was not posted
In reviewing the accounts of Tumblers 00, you discovered that a credit of $1,000 to prepaid insurance was wrongly credited to accounts receivable, and an $800 prepayment was remitted for a radio advertisement that was not posted.
Which of the following statements reflects the effect of the errors?
a) Total assets is understated by $200 and owner's equity is understated by $200.
b) There is no overstatement or understatement in the total assets and the owner's equity.
c) Total assets are overstated by S500 and the owner's equity is overstated by $500.
d) Total assets are understated by $1,800, and owner's equity is understated by $1000.
e) Total assets are overstated by $300 and owner's equity is overstated by $300.
Expert Solution
Answer: b) There is no overstatement or understatement in the total assets and the owner's equity.
The error on credit of $1,000 to accounts receivable instead of prepaid insurance will have no impact on total assets amount, because both accounts are asset accounts, and the understatement to prepaid insurance account will be offset to the overstatement on accounts receivable account. Not posting a prepayment will also have no impact on total assets because it will just be a failure to transfer the amount from one asset to another (cash to prepaid asset). Owner's equity would not be affected by both errors.
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