Chapter 2, Problem 11EYK

a.

To determine

Prepare a trial balance for Company F as of December 31, 2016.

Explanation of Solution

Trial balance:

Trial balance is the summary of accounts, and their debit and credit balances at a given time.  It is usually prepared at end of the accounting period.  Debit balances are listed in left   column and credit balances are listed in right column.  The totals of debit and credit column should be equal.  Trial balance is useful in the preparation of the financial statements.

Errors responsible for the mismatch of trial balance are given below:

Error 1:

Cash purchase of inventory worth of $20,000 wan not recorded in the trial balance.

This is a case of error omission. Though omission of inventory purchase is an error but it does not have any impact on the matching of trial balance, this transaction has not impact on either side of the trial balance.

Error 2:

Accounts payable worth of $5,000 was wrongly recorded as notes payable.

This error will understate the total balance of the accounts payable, and overstate the balance of notes payable. Thus, the error in accounts payable account is be compensated by error in notes payable account. It will not affect the matching of trial balance as both have impact on the credit side of trial balance.

Error 3:

The credit in sales account worth of $26,000 is posted wrongly in wages account.

This error will understate the credit side by $26,000 as the sales account is understated. The wages account has credited by $26,000. The wages account shows debit balance. Thus, the wrong credit in wages account has understated the wages expense account with $26,000.  This error will cause mismatch of trial balance.

Error 4:

The sale on account worth of $18,750 was recorded in the sales revenue account, but not recorded in the accounts receivable account.

The partial omission of recording in accounts receivable account will understate the debit side of the trial balance by $18,750. This, error will mismatch the trial balance.

Therefore, the error 3, and error 4 are the reason for mismatch of the trial balance.

b.

To determine

Identify the error required to be corrected

Explanation of Solution

• All the four of the errors explained in requirement 1 have to be corrected. Error 1 and 2 does not affect the arithmetical accuracy of the trial balance. Therefore, error 3 and 4 are reason for the mismatch of the trial balance.
• The debit and credit balance of the trial balance will be equal if the error 3 and error 4 is corrected but the trial balance will not correct as the purchase of inventory is wrongly recorded in the notes payable and accounts payable account. Therefore, all of the four errors have to be corrected to prepare a correct trial balance.

c.

To determine

Prepare the corrected trial balance

Explanation of Solution

Corrected trial balance is prepared as follows:

Distributors L
Trial Balance
As of December 31, 2016
Accounts	Debit ($)	Credit ($)
Cash (1)	3,000
Accounts Receivable (2)	23,250
Inventory (3)	58,000
Equipment	20,500
Building	72,000
Accounts Payable (4)		10,500
Notes payable (5)		42,750
Common Stock		42,000
Dividend	6,000
Sales revenue (6)		306,250
Wages (7)	126,000
Selling expenses	31,000
Rent expenses	23,000
Tax expenses	23,000
Administrative expenses	15,750
Total	401,500	401,500

Table (1)

Working notes:

Calculate the correct amount of cash balance:

$\begin{array}{c}\text{Correct cash balance}=\left(\begin{array}{l}\text{Cash balance in the unadjusted trial balance}\\ -\text{Payment for inventory purchase}\end{array}\right)\\ =\$23,000-\$20,000\\ =\$3,000\end{array}$ (1)

Note: In error 1, the cash purchase of inventory is not recorded in the accounts. Therefore, for correcting the balance of cash account the cash payment of $20,000 for inventory will be subtracted from the cash balance of unadjusted trial balance.

Calculate the correct amount of accounts receivable:

$\begin{array}{c}\text{Correct Accounts receivable}=\left(\begin{array}{l}\left(\begin{array}{l}\text{Accounts receivable balance }\\ \text{in the unadjusted trial balance}\end{array}\right)\\ +\text{Credit sales}\end{array}\right)\\ =\$4,500-\$18,750\\ =\$23,250\end{array}$ (2)

Note: In error 4, credit sale of $18,740 was not recorded in accounts receivable account. Therefore, for correcting the balance of accounts receivable account the credit sales of $26,000 is added to accounts receivable balance of unadjusted trial balance.

Calculate the correct amount of Inventory:

$\begin{array}{c}\text{Correct Inventory balance}=\left(\begin{array}{l}\text{Inventory balance in the unadjusted trial balance}\\ -\text{Inventory purchase}\end{array}\right)\\ =\$38,000-\$20,000\\ =\$58,000\end{array}$ (3)

Note: In error 1, the cash purchase of inventory is not recorded in the accounts. Therefore, for correcting the balance of inventory account the purchase of inventory worth of $20,000 is added along with the inventory balance of unadjusted trial balance.

Calculate the correct amount of accounts payable:

$\begin{array}{c}\text{Correct accounts payable balance}=\left(\begin{array}{l}\left(\begin{array}{l}\text{Accounts payable balance }\\ \text{in the unadjusted trial balance}\end{array}\right)\\ +\$5,000\end{array}\right)\\ =\$5,500+\$5,000\\ =\$10,500\end{array}$ (4)

Note: In error 2, $5,000 accounts payable is recorded in the notes payable account. Therefore, for correcting the accounts payable balance, add $5,000 along with the accounts payable balance of unadjusted trial balance.

Calculate the correct notes payable:

$\begin{array}{c}\text{Correct notes payable balance}=\left(\begin{array}{l}\left(\begin{array}{l}\text{Notes payable balance }\\ \text{in the unadjusted trial balance}\end{array}\right)\\ -\$5,000\end{array}\right)\\ =\$47,750-\$5,000\\ =\$42,750\end{array}$ (5)

Note: In error 2, $5,000 accounts payable is recorded in the notes payable account. Therefore, for correcting the notes payable balance, subtract $5,000 along with the notes payable balance of unadjusted trial balance.

Calculate the correct amount of sales revenue:

$\begin{array}{c}\text{Correct sales revenue}=\left(\begin{array}{l}\text{Sales revenue in the unadjusted trial balance}\\ +\text{\$26,000}\end{array}\right)\\ =\$280,250+\$26,000\\ =\$306,250\end{array}$ (6)

Note: In error 3, the credit of $26,000 to sales account was credited to wages expense account. Therefore, for correcting the sales revenue $26,000 will be added along with the sales revenue balance of unadjusted trial balance.

Calculate the correct amount of wages expense:

$\begin{array}{c}\text{Correct wages expense}=\left(\begin{array}{l}\text{wages in the unadjusted trial balance}\\ +\text{\$26,000}\end{array}\right)\\ =\$100,000+\$26,000\\ =\$126,000\end{array}$ (7)

Note: In error 3, the credit of $26,000 to sales account was credited to wages expense account. The wages account shows a normal debit balance. Therefore, for correcting the wages expense of $26,000 is added along with the wages expense balance of unadjusted trial balance.