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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Prior Period Adjustments Scobie Company began 2019 with a retained earnings balance of $142,400. During an examination of its accounting records on December 31, 2019, Scobie found it had made the following material errors, for both financial reporting and income tax reporting, during 2018.

  1. 1. Depreciation expense of $15,000 inadvertently had been recorded twice for the same machine.
  2. 2. No accrual had been made at year-end for interest; therefore, interest expense had been understated by $4,000.

Scobie’s net income after taxes during 2019 was $60,000. The company has been subject to a 30% income tax rate for the past several years. It declared and paid dividends of $13,000 during 2019.

Required:

  1. 1. Prepare whatever journal entries in 2019 are necessary to correct Scobie’s books for its previous errors. Make your corrections directly to the Retained Earnings account.
  2. 2. Prepare the statement of retained earnings for 2019.

1.

To determine

Prepare journal entry to record the given transaction to correct the errors in the Company B books.

Explanation

Correcting entry:

When an incorrect entry is journalized and posted to wrong account it must be corrected using the proper entry. As a result, while there is an occurrence of error the correcting entry is required to be made.

Retained earnings:

Retained earnings are that portion of profits which are earned by a company but not distributed to stockholders in the form of dividends. These earnings are retained for various purposes like expansion activities, or funding any future plans.

1.

Prepare the correcting entry for record the depreciation expense that was recorded twice for a same machine.

DateAccount Titles and explanationDebit ($)Credit ($)
 Accumulated depreciation 15,000 
      Retained earnings 15,000
 ( To correct the depreciation  expense that were recorded twice )  

(Table 1)

  • Accumulated depreciation is a contra asset and it has increased. Hence, debit the accumulated depreciation by $15,000.
  • Retained earnings are a component of stockholders equity and there is an increase in the value of the retained earnings. Hence, credit the retained earnings by $15,000.
DateAccount Titles and explanationDebit ($)Credit ($)
 Retained earnings 4,500 
 

     Income tax payable on prior earnings

    ($15,000×30%)

 4,500
 ( To record payment on income tax that  were earned earlier)  

(Table 2)

  • Retained earnings are a component of stockholders equity and there is a decrease in the value of the retained earnings

2.

To determine

Ascertain the statement of the retained earnings for the year 2019.

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