King Enterprises is a book wholesaler. King hired a new accounting clerk on January 1 of the current year. The new clerk does not understand accrual accounting and recorded the following transactions based on when cash receipts and disbursements changed hands rather than when the transaction occurred. King uses a perpetual inventory system, and its accounting policy calls for inventory purchases to be recorded net of any discounts offered. Jan. 10 Paid Aztec Enterprises $9,900 for books that it received on December 15. (This purchase was recorded as a debit to Inventory and a credit to Accounts Payable on December 15 of last year, but the accounting clerk ignores that fact.) Dec. 27 Received books from McSaw Inc. for $20,500; terms 2/10, n/30. Dec. 30 Sold books to Booksellers Unlimited for $31,000; terms 1/10, n/30. The cost of these books to King was $25,000. Required: a. As a result of the accounting clerk's errors, compute the amount by which the following accounts are overstated or understated. 1. Accounts Receivable 2. Inventory 3. Accounts Payable 4. Sales 5. Cost of Goods Sold b. Compute the amount by which net income is overstated or understated. c. Prepare a single journal entry to correct the errors that the accounting clerk has made. (Assume that King has yet to close its books for the current year.) d. Assume that King has already closed its books for the current year. Make a single journal entry to correct the errors that the accounting clerk has made. e. Assume that the ending inventory balance is correctly stated based on adjustments resulting from a physical inventory count. (Cost of Goods Sold was debited or credited based on the inventory adjustment.) Assume that King has already closed its books for the current year, and make a single journal entry to correct the errors that the accounting clerk has made.
King Enterprises is a book wholesaler. King hired a new accounting clerk on January 1 of the current year. The new clerk does not understand accrual accounting and recorded the following transactions based on when cash receipts and disbursements changed hands rather than when the transaction occurred. King uses a perpetual inventory system, and its accounting policy calls for inventory purchases to be recorded net of any discounts offered.
| Jan. | 10 | Paid Aztec Enterprises $9,900 for books that it received on December 15. (This purchase was recorded as a debit to Inventory and a credit to Accounts Payable on December 15 of last year, but the accounting clerk ignores that fact.) | |
| Dec. | 27 | Received books from McSaw Inc. for $20,500; terms 2/10, n/30. | |
| Dec. | 30 | Sold books to Booksellers Unlimited for $31,000; terms 1/10, n/30. The cost of these books to King was $25,000. |
Required:
a. As a result of the accounting clerk's errors, compute the amount by which the following accounts are overstated or understated.
1.
2. Inventory
3. Accounts Payable
4. Sales
5. Cost of Goods Sold
b. Compute the amount by which net income is overstated or understated.
c. Prepare a single
d. Assume that King has already closed its books for the current year. Make a single journal entry to correct the errors that the accounting clerk has made.
e. Assume that the ending inventory balance is correctly stated based on adjustments resulting from a physical inventory count. (Cost of Goods Sold was debited or credited based on the inventory adjustment.) Assume that King has already closed its books for the current year, and make a single journal entry to correct the errors that the accounting clerk has made.
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