Concept explainers
Correction of errors:
Correction of errors is the adjustment of inadvertent discrepancies that has occurred while reporting the financial statements. Correction of error is done to rectify the financial statements.
To journalize: The necessary
Explanation of Solution
(a) Error correction entry:
Date | Account Explanation / Titles | Post ref. | Amount ($) | |
Debit | Credit | |||
Equipment | 45,000 | |||
|
18,000 | |||
|
27,000 | |||
(To record accumulated depreciation correction) |
Table (1)
- Equipment is an asset. There is increase in an asset. Thus, it is debited.
- Accumulated depreciation is a contra asset. There is a decrease in value of asset. Therefore credit accumulated depreciation by $18,000.
Adjustment entry:
Date | Account Explanation / Titles | Post ref. | Amount ($) | |
Debit | Credit | |||
Depreciation expense (2) | 9,000 | |||
Accumulated depreciation | 9,000 | |||
(To record accumulated depreciation) |
Table (2)
- Depreciation expense is an expense. There is an increase in expense, thus it is debited.
- Accumulated depreciation is a contra asset. There is a decrease in value of asset. Therefore credit accumulated depreciation by $9,000
Working Notes:
Determine the amount of accumulation depreciation of two years.
Determine the amount of depreciation expense.
(b) Reverse the wrong entry:
Date | Account Explanation / Titles | Post ref. | Amount ($) | |
Debit | Credit | |||
Cash | 17,000 | |||
Office Supplies | 17,000 | |||
(To reverse the wrongly recorded transaction) |
Table (3)
- Cash is an asset and increased, hence debit cash.
- Office Supplies is an expense. There is a decrease in expense, thus it is credited.
Adjustment entry:
Date | Account Explanation / Titles | Post ref. | Amount ($) | |
Debit | Credit | |||
Assembling Tools | 17,000 | |||
Cash | 17,000 | |||
(To record purchase of assembling tools) |
Table (4)
- Assembling Tools expense is an expense. There is an increase in expense, thus it is debited.
- Cash is paid while purchasing assembling tools which has reduced the amount of cash, so it has been credited.
(c) Record the correct entry:
Date | Account Explanation / Titles | Post ref. | Amount ($) | |
Debit | Credit | |||
Inventory | 78,000 | |||
Retained earnings | 78,000 | |||
(To record change in inventory) |
Table (5)
- Inventory is an asset. There is an increase in asset, thus it is debited.
- Retained earnings have been understated, so it has been credited.
(d) Record the correct entry:
Date | Account Explanation / Titles | Post ref. | Amount ($) | |
Debit | Credit | |||
Retained earnings (3) | 22,000 | |||
Paid in capital | 22,000 | |||
(To record small stock dividend) |
Table (6)
Explanation:
- Stock dividend is paid out of retained earnings. Hence, there is a decrease in retained earnings. Thus, it is debited.
- Paid in excess of capital is a liability. There is an increase in liability. Thus, it is credited.
Working Notes:
Determine the amount of stock dividend.
e) Error correction entry:
Date | Account Explanation / Titles | Post ref. | Amount ($) | |
Debit | Credit | |||
Retained earnings (5) | 104,000 | |||
Interest expense | 104,000 | |||
(To record the correct entry) |
Table (7)
- Retained earnings have been overstated in the year 2017. Hence, it is debited.
- Interest expense has been overstated in the year 2018. Hence, it is credited.
This problem can be further explained as follows.
Date | Account Explanations/ Titles | Post Ref. | Amount ($) | |
Debit | Credit | |||
2017 | ||||
September1 | Interest expense | 156,000 | ||
Cash | 156,000 | |||
( To record the , semi-annual interest payment) | ||||
December 31 | Interest expense (5) | 104,000 | ||
Interest payable | 104,000 | |||
( To record the adjusting entry ) | ||||
2018 | ||||
March 1 | Interest expense (4) | 52,000 | ||
Interest payable | 104,000 | |||
Cash | 156,000 | |||
( To record thesemi-annual interest payment) |
Table (8)
Determine the interest expense payable.
Interest is payable semi annually. So, interest from January to February.
Incorrect entries have been recorded.
Date | Account Explanations/ Titles | Post Ref | Amount ($) | |
Debit | Credit | |||
September 1, 2017 |
Interest expense | 156,000 | ||
Cash | 156,000 | |||
March 1, 2018 |
( To record the semi-annual interest payment) |
|||
Interest expense | 156,000 | |||
Cash | 156,000 | |||
(To record the semi-annual interest payment) |
Table (9)
Adjustment entry:
Date | Account Explanation / Titles | Post ref. | Amount ($) | |
Debit | Credit | |||
Interest expense (5) | 104,000 | |||
Interest payable | 104,000 | |||
(To record the adjustment entry) |
Table (10)
Working Notes:
Determine the interest expense payable.
Interest is payable semi annually. So, interest of 4 months from September 1 to December 31.
(f) Error correction entry:
Date | Account Explanation / Titles | Post ref. | Amount ($) | |
Debit | Credit | |||
Prepaid insurance | 48,000 | |||
Retained earnings | 48,000 | |||
(To correctly record the prepaid insurance as expense ) |
Table (11)
Working Notes:
Determine the wrongly credited prepaid insurance expense.
The insurance payable for the year 2018-2019:
Adjustment entry:
Date | Account Explanation / Titles | Post ref. | Amount ($) | |
Debit | Credit | |||
Insurance (7) | 24,000 | |||
Prepaid insurance | 24,000 | |||
(To record the adjustment entry for the insurance) |
Table (12)
Working Notes:
Determine the annual prepaid insurance expense payable.
The insurance amount payable for the year 2018:
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