Prepare correct journal entries for Company S, if the errors are discovered before the books are closed, at the end of 2017.

Question

Want to see more full solutions like this?

Answer 1

Question

Chapter 22, Problem 9P

1.

To determine

Prepare correct journal entries for Company S, if the errors are discovered before the books are closed, at the end of 2017.

1.

Expert Solution

Explanation of Solution

Errors: The comparability and consistency of the financial statements decreases when a company records arithmetic mistakes, or errors. Such errors do require adjustments to make the financial information more reliable, and more relevant.

Journal entry: Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Debit and credit rules:

Debit an increase in asset account, increase in expense account, decrease in liability account, and decrease in stockholders’ equity accounts.
Credit decrease in asset account, increase in revenue account, increase in liability account, and increase in stockholders’ equity accounts.

Prepare correct journal entries for Company S, if the errors are discovered before the books are closed, at the end of 2017.

a.

Journal entry to correct the failure to record discount on note payable:

Date	Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
	Discount on Note Payable			32,803
		Building			32,803
	(Record discount on notes payable)

Table (1)

Description:

Discount on Note Payable is a contra-liability account to Notes Payable account. The contra-liability account increased, and an increase in contra-liability is debited.
Building is an asset account. The asset value decreased due to discount, and a decrease in asset is credited.

Working Note 1:

Compute discount on note payable value.

Discount on note payable = {Note payable value–(Note payable value×Present value of $1 at 12% for 1 time period)}=$90,000–($90,000×0.635518)=$90,000–$57,197=$32,803

Journal entry to correct the erroneous depreciation expense:

Date	Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
	Accumulated Depreciation–Building			1,093
		Depreciation Expense–Building			1,093
	(Record reduction in depreciation expense)

Table (2)

Description:

Accumulated Depreciation–Building is a contra-asset account. Since the depreciation expense was overstated by $1,093, the accumulated depreciation is also overstated. Hence, the contra-asset account is debited to decrease the expense value.
Depreciation Expense is an expense account. Since the depreciation expense was overstated by $1,093, the expense account is credited to decrease the expense value.

Working Note 2:

Compute overstated (understated) depreciation expense value (Refer to Working Note 1 for value and computation of discount on note payable).

Overstated (understated)depreciation expense} = {Incorrectly recorded depreciation expense–Correct depreciation expense}=$90,00030 years – ($90,000–$32,903)30 years=$3,000–$1,907=$1,093

Journal entry to correct the failure to record interest expense:

Date	Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
	Interest Expense			6,864
		Discount on Note Payable			6,864
	(Record interest expense on notes payable)

Table (3)

Description:

Interest Expense is an expense account. Since expenses decrease equity, equity value is decreased, and a decrease in equity is debited.
Discount on Note Payable is a contra-liability account to Notes Payable account. The discount is amortized, hence the contra-liability account value decreased, and a decrease in contra-liability is credited.

Working Note 3:

Compute interest expense.

Interest expense = (Building value×Interest rate percentage)=($57,197×12%)=$6,864

b.

Journal entry to correct the 2016overstated inventory:

Date	Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
	Retained Earnings			35,000
		Cost of Goods Sold			35,000
	(Record reduction in overstated retained earnings)

Table (4)

Description:

Retained Earnings is an equity account. Since ending inventory in 2016was overstated, cost of goods sold of 2016 were understated, and hence, revenue is overstated in 2019. The retained earnings account is debited to decrease the overstated equity.
Cost of Goods Sold is an equity account. Since cost of goods sold of 2017 wasoverstated, the expense account is credited to decrease the overstated equity.

Journal entry to correct the 2017 overstated inventory:

Date	Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
	Cost of Goods Sold			15,000
		Inventory			15,000
	(Record reduction in overstated inventory and increase in understated cost of goods sold)

Table (5)

Description:

Cost of Goods Sold is an equity account. Since ending inventory in 2017 was overstated, cost of goods sold of 2017 were understated. The expense account is debited to increase the understated equity.
Inventory is an asset account. Since ending inventory in 2017 was overstated, the value of assets increased. The asset account is credited to decrease the overstated asset account.

c.

Journal entry to correct the 2016 failure to accrue salaries and wages:

Date	Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
	Retained Earnings			18,000
		Salaries and Wages Expense			18,000
	(Record reduction in overstated retained earnings)

Table (6)

Description:

Retained Earnings is an equity account. Since accrued wages were not recorded and wages expense was not included in the computation of net income, the net income of 2016 was overstated. Hence, the equity account is debited to decrease the overstated value.
Salaries and Wages Expense is an equity account. Since salaries and wages expense of $18,000 which belong to 2016 were recorded in 2017, the expenses of 2017 was overstated. The expense account is credited to decrease the overstated equity.

Journal entry to correct the 2017 failure to accrue salaries and wages:

Date	Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
	Salaries and Wages Expense			10,000
		Salaries and Wages Payable			10,000
	(Record accrued salaries and wages expense)

Table (7)

Description:

Salaries and Wages Expense is an expense account. Since expenses decrease equity, equity value is decreased, and a decrease in equity is debited.
Salaries and Wages Payable is a liability account. Since the liability to pay salaries and wages expense has increased, liability increased, and an increase in liability is credited.

2.

To determine

Prepare correct journal entries for Company S, if the errors are discovered after the books are closed, at the end of 2017.

2.

Expert Solution

Explanation of Solution

Prepare correct journal entries for Company S, if the errors are discovered after the books are closed, at the end of 2017.

a.

Journal entry to correct the failure to record discount on note payable, accumulated depreciation, and interest expense (Refer to Requirement 1-(a) for all the computations):

Date	Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
	Discount on Note Payable			25,939
	Accumulated Depreciation–Building			1,093
	Retained Earnings			5,771
		Building			32,803
	(Record discount on notes payable, accumulated depreciation)

Table (8)

Description:

Discount on Note Payable is a contra-liability account to Notes Payable account. The contra-liability account increased, and an increase in contra-liability is debited with the total of discount of $32,803, less discount of $6,864 amortized in 2020.
Accumulated Depreciation–Building is a contra-asset account. Since the depreciation expense was overstated by $1,093, the accumulated depreciation is also overstated. Hence, the contra-asset account is debited to decrease the expense value.
Retained Earnings is an equity account. Since understatement of $6,864 of interest expense and overstatement of $1,093 of depreciation expense overstated the net income of 2020. Hence, the equity account is debited by the difference of $5,771 to decrease the overstated value.
Building is an asset account. The asset value decreased due to discount, and a decrease in asset is credited.

b.

The error of 2016 overstated inventory would be counterbalanced at the end of 2017.

Journal entry to correct the 2017 overstated inventory:

Date	Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
	Retained Earnings			15,000
		Inventory			15,000
	(Record reduction in overstated inventory and increase in understated cost of goods sold)

Table (9)

Description:

Retained Earnings is an equity account. Since ending inventory in 2017 was overstated, cost of goods sold of 2017 was understated, and hence, revenue is overstated in 2020. The retained earnings account is debited to decrease the overstated equity.
Inventory is an asset account. Since ending inventory in 2017 was overstated, the value of assets increased. The asset account is credited to decrease the overstated asset account.

c.

The errors of 2015 and 2016 un-accrued expenses would be counterbalanced at the end of 2016 and 2017 respectively.

Journal entry to correct the 2017 failure to accrue salaries and wages:

Date	Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
	Retained Earnings			10,000
		Salaries and Wages Payable			10,000
	(Record accrued salaries and wages expense)

Table (10)

Description:

Retained Earnings is an equity account. Since accrued wages were not recorded and wages expense was not included in the computation of net income, the net income of 2017 was overstated. Hence, the equity account is debited to decrease the overstated value.
Salaries and Wages Payable is a liability account. Since the liability to pay salaries and wages expense has increased, liability increased, and an increase in liability is credited.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Students have asked these similar questions

The first audit of the books of Sweet Company was made for the year ended December 31, 2021. In examining the books, the auditor found that certain items had been overlooked or incorrectly handled in the last 3 years. These items are: 1. At the beginning of 2019, the company purchased a machine for $534,000 (salvage value of $53,400) that had a useful life of 6 years. The bookkeeper used straight-line depreciation but failed to deduct the salvage value in computing the depreciation base for the 3 years. 2. At the end of 2020, the company failed to accrue sales salaries of $42,000. 3. A tax lawsuit that involved the year 2019 was settled late in 2021. It was determined that the company owed an additional $90,000 in taxes related to 2019. The company did not record a liability in 2019 or 2020 because the possibility of loss was considered remote, and charged the $90,000 to a loss account in 2021. 4. Sweet Company purchased a copyright from another company early in 2019…

The first audit of the books of Windsor Company was made for the year ended December 31, 2021. In examining the books, the auditor found that certain items had been overlooked or incorrectly handled in the last 3 years. These items are: 1. At the beginning of 2019, the company purchased a machine for $528,000 (salvage value of $52,800) that had a useful life of 6 years. The bookkeeper used straight-line depreciation but failed to deduct the salvage value in computing the depreciation base for the 3 years. 2. At the end of 2020, the company failed to accrue sales salaries of $49,000. 3. A tax lawsuit that involved the year 2019 was settled late in 2021. It was determined that the company owed an additional $81,000 in taxes related to 2019. The company did not record a liability in 2019 or 2020 because the possibility of loss was considered remote, and charged the $81,000 to a loss account in 2021. 4. Windsor Company purchased a copyright from another company early in…

In 2018, internal auditors discovered that PKE Displays, Inc., had debited an expense account for the $350,000cost of a machine purchased on January 1, 2015. The machine’s useful life was expected to be five years withno residual value. Straight-line depreciation is used by PKE. Ignoring income taxes, what journal entry will PKEuse to correct the error?

Answer 2

Question

Chapter 22, Problem 9P

1.

To determine

Prepare correct journal entries for Company S, if the errors are discovered before the books are closed, at the end of 2017.

1.

Expert Solution

Explanation of Solution

Errors: The comparability and consistency of the financial statements decreases when a company records arithmetic mistakes, or errors. Such errors do require adjustments to make the financial information more reliable, and more relevant.

Journal entry: Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Debit and credit rules:

Debit an increase in asset account, increase in expense account, decrease in liability account, and decrease in stockholders’ equity accounts.
Credit decrease in asset account, increase in revenue account, increase in liability account, and increase in stockholders’ equity accounts.

Prepare correct journal entries for Company S, if the errors are discovered before the books are closed, at the end of 2017.

a.

Journal entry to correct the failure to record discount on note payable:

Date	Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
	Discount on Note Payable			32,803
		Building			32,803
	(Record discount on notes payable)

Table (1)

Description:

Discount on Note Payable is a contra-liability account to Notes Payable account. The contra-liability account increased, and an increase in contra-liability is debited.
Building is an asset account. The asset value decreased due to discount, and a decrease in asset is credited.

Working Note 1:

Compute discount on note payable value.

Discount on note payable = {Note payable value–(Note payable value×Present value of $1 at 12% for 1 time period)}=$90,000–($90,000×0.635518)=$90,000–$57,197=$32,803

Journal entry to correct the erroneous depreciation expense:

Date	Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
	Accumulated Depreciation–Building			1,093
		Depreciation Expense–Building			1,093
	(Record reduction in depreciation expense)

Table (2)

Description:

Accumulated Depreciation–Building is a contra-asset account. Since the depreciation expense was overstated by $1,093, the accumulated depreciation is also overstated. Hence, the contra-asset account is debited to decrease the expense value.
Depreciation Expense is an expense account. Since the depreciation expense was overstated by $1,093, the expense account is credited to decrease the expense value.

Working Note 2:

Compute overstated (understated) depreciation expense value (Refer to Working Note 1 for value and computation of discount on note payable).

Overstated (understated)depreciation expense} = {Incorrectly recorded depreciation expense–Correct depreciation expense}=$90,00030 years – ($90,000–$32,903)30 years=$3,000–$1,907=$1,093

Journal entry to correct the failure to record interest expense:

Date	Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
	Interest Expense			6,864
		Discount on Note Payable			6,864
	(Record interest expense on notes payable)

Table (3)

Description:

Interest Expense is an expense account. Since expenses decrease equity, equity value is decreased, and a decrease in equity is debited.
Discount on Note Payable is a contra-liability account to Notes Payable account. The discount is amortized, hence the contra-liability account value decreased, and a decrease in contra-liability is credited.

Working Note 3:

Compute interest expense.

Interest expense = (Building value×Interest rate percentage)=($57,197×12%)=$6,864

b.

Journal entry to correct the 2016overstated inventory:

Date	Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
	Retained Earnings			35,000
		Cost of Goods Sold			35,000
	(Record reduction in overstated retained earnings)

Table (4)

Description:

Retained Earnings is an equity account. Since ending inventory in 2016was overstated, cost of goods sold of 2016 were understated, and hence, revenue is overstated in 2019. The retained earnings account is debited to decrease the overstated equity.
Cost of Goods Sold is an equity account. Since cost of goods sold of 2017 wasoverstated, the expense account is credited to decrease the overstated equity.

Journal entry to correct the 2017 overstated inventory:

Date	Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
	Cost of Goods Sold			15,000
		Inventory			15,000
	(Record reduction in overstated inventory and increase in understated cost of goods sold)

Table (5)

Description:

Cost of Goods Sold is an equity account. Since ending inventory in 2017 was overstated, cost of goods sold of 2017 were understated. The expense account is debited to increase the understated equity.
Inventory is an asset account. Since ending inventory in 2017 was overstated, the value of assets increased. The asset account is credited to decrease the overstated asset account.

c.

Journal entry to correct the 2016 failure to accrue salaries and wages:

Date	Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
	Retained Earnings			18,000
		Salaries and Wages Expense			18,000
	(Record reduction in overstated retained earnings)

Table (6)

Description:

Retained Earnings is an equity account. Since accrued wages were not recorded and wages expense was not included in the computation of net income, the net income of 2016 was overstated. Hence, the equity account is debited to decrease the overstated value.
Salaries and Wages Expense is an equity account. Since salaries and wages expense of $18,000 which belong to 2016 were recorded in 2017, the expenses of 2017 was overstated. The expense account is credited to decrease the overstated equity.

Journal entry to correct the 2017 failure to accrue salaries and wages:

Date	Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
	Salaries and Wages Expense			10,000
		Salaries and Wages Payable			10,000
	(Record accrued salaries and wages expense)

Table (7)

Description:

Salaries and Wages Expense is an expense account. Since expenses decrease equity, equity value is decreased, and a decrease in equity is debited.
Salaries and Wages Payable is a liability account. Since the liability to pay salaries and wages expense has increased, liability increased, and an increase in liability is credited.

2.

To determine

Prepare correct journal entries for Company S, if the errors are discovered after the books are closed, at the end of 2017.

2.

Expert Solution

Explanation of Solution

Prepare correct journal entries for Company S, if the errors are discovered after the books are closed, at the end of 2017.

a.

Journal entry to correct the failure to record discount on note payable, accumulated depreciation, and interest expense (Refer to Requirement 1-(a) for all the computations):

Date	Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
	Discount on Note Payable			25,939
	Accumulated Depreciation–Building			1,093
	Retained Earnings			5,771
		Building			32,803
	(Record discount on notes payable, accumulated depreciation)

Table (8)

Description:

Discount on Note Payable is a contra-liability account to Notes Payable account. The contra-liability account increased, and an increase in contra-liability is debited with the total of discount of $32,803, less discount of $6,864 amortized in 2020.
Accumulated Depreciation–Building is a contra-asset account. Since the depreciation expense was overstated by $1,093, the accumulated depreciation is also overstated. Hence, the contra-asset account is debited to decrease the expense value.
Retained Earnings is an equity account. Since understatement of $6,864 of interest expense and overstatement of $1,093 of depreciation expense overstated the net income of 2020. Hence, the equity account is debited by the difference of $5,771 to decrease the overstated value.
Building is an asset account. The asset value decreased due to discount, and a decrease in asset is credited.

b.

The error of 2016 overstated inventory would be counterbalanced at the end of 2017.

Journal entry to correct the 2017 overstated inventory:

Date	Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
	Retained Earnings			15,000
		Inventory			15,000
	(Record reduction in overstated inventory and increase in understated cost of goods sold)

Table (9)

Description:

Retained Earnings is an equity account. Since ending inventory in 2017 was overstated, cost of goods sold of 2017 was understated, and hence, revenue is overstated in 2020. The retained earnings account is debited to decrease the overstated equity.
Inventory is an asset account. Since ending inventory in 2017 was overstated, the value of assets increased. The asset account is credited to decrease the overstated asset account.

c.

The errors of 2015 and 2016 un-accrued expenses would be counterbalanced at the end of 2016 and 2017 respectively.

Journal entry to correct the 2017 failure to accrue salaries and wages:

Date	Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
	Retained Earnings			10,000
		Salaries and Wages Payable			10,000
	(Record accrued salaries and wages expense)

Table (10)

Description:

Retained Earnings is an equity account. Since accrued wages were not recorded and wages expense was not included in the computation of net income, the net income of 2017 was overstated. Hence, the equity account is debited to decrease the overstated value.
Salaries and Wages Payable is a liability account. Since the liability to pay salaries and wages expense has increased, liability increased, and an increase in liability is credited.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Answer 3

Question

Chapter 22, Problem 9P

1.

To determine

Prepare correct journal entries for Company S, if the errors are discovered before the books are closed, at the end of 2017.

1.

Expert Solution

Explanation of Solution

Errors: The comparability and consistency of the financial statements decreases when a company records arithmetic mistakes, or errors. Such errors do require adjustments to make the financial information more reliable, and more relevant.

Journal entry: Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Debit and credit rules:

Debit an increase in asset account, increase in expense account, decrease in liability account, and decrease in stockholders’ equity accounts.
Credit decrease in asset account, increase in revenue account, increase in liability account, and increase in stockholders’ equity accounts.

Prepare correct journal entries for Company S, if the errors are discovered before the books are closed, at the end of 2017.

a.

Journal entry to correct the failure to record discount on note payable:

Date	Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
	Discount on Note Payable			32,803
		Building			32,803
	(Record discount on notes payable)

Table (1)

Description:

Discount on Note Payable is a contra-liability account to Notes Payable account. The contra-liability account increased, and an increase in contra-liability is debited.
Building is an asset account. The asset value decreased due to discount, and a decrease in asset is credited.

Working Note 1:

Compute discount on note payable value.

Discount on note payable = {Note payable value–(Note payable value×Present value of $1 at 12% for 1 time period)}=$90,000–($90,000×0.635518)=$90,000–$57,197=$32,803

Journal entry to correct the erroneous depreciation expense:

Date	Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
	Accumulated Depreciation–Building			1,093
		Depreciation Expense–Building			1,093
	(Record reduction in depreciation expense)

Table (2)

Description:

Accumulated Depreciation–Building is a contra-asset account. Since the depreciation expense was overstated by $1,093, the accumulated depreciation is also overstated. Hence, the contra-asset account is debited to decrease the expense value.
Depreciation Expense is an expense account. Since the depreciation expense was overstated by $1,093, the expense account is credited to decrease the expense value.

Working Note 2:

Compute overstated (understated) depreciation expense value (Refer to Working Note 1 for value and computation of discount on note payable).

Overstated (understated)depreciation expense} = {Incorrectly recorded depreciation expense–Correct depreciation expense}=$90,00030 years – ($90,000–$32,903)30 years=$3,000–$1,907=$1,093

Journal entry to correct the failure to record interest expense:

Date	Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
	Interest Expense			6,864
		Discount on Note Payable			6,864
	(Record interest expense on notes payable)

Table (3)

Description:

Interest Expense is an expense account. Since expenses decrease equity, equity value is decreased, and a decrease in equity is debited.
Discount on Note Payable is a contra-liability account to Notes Payable account. The discount is amortized, hence the contra-liability account value decreased, and a decrease in contra-liability is credited.

Working Note 3:

Compute interest expense.

Interest expense = (Building value×Interest rate percentage)=($57,197×12%)=$6,864

b.

Journal entry to correct the 2016overstated inventory:

Date	Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
	Retained Earnings			35,000
		Cost of Goods Sold			35,000
	(Record reduction in overstated retained earnings)

Table (4)

Description:

Retained Earnings is an equity account. Since ending inventory in 2016was overstated, cost of goods sold of 2016 were understated, and hence, revenue is overstated in 2019. The retained earnings account is debited to decrease the overstated equity.
Cost of Goods Sold is an equity account. Since cost of goods sold of 2017 wasoverstated, the expense account is credited to decrease the overstated equity.

Journal entry to correct the 2017 overstated inventory:

Date	Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
	Cost of Goods Sold			15,000
		Inventory			15,000
	(Record reduction in overstated inventory and increase in understated cost of goods sold)

Table (5)

Description:

Cost of Goods Sold is an equity account. Since ending inventory in 2017 was overstated, cost of goods sold of 2017 were understated. The expense account is debited to increase the understated equity.
Inventory is an asset account. Since ending inventory in 2017 was overstated, the value of assets increased. The asset account is credited to decrease the overstated asset account.

c.

Journal entry to correct the 2016 failure to accrue salaries and wages:

Date	Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
	Retained Earnings			18,000
		Salaries and Wages Expense			18,000
	(Record reduction in overstated retained earnings)

Table (6)

Description:

Retained Earnings is an equity account. Since accrued wages were not recorded and wages expense was not included in the computation of net income, the net income of 2016 was overstated. Hence, the equity account is debited to decrease the overstated value.
Salaries and Wages Expense is an equity account. Since salaries and wages expense of $18,000 which belong to 2016 were recorded in 2017, the expenses of 2017 was overstated. The expense account is credited to decrease the overstated equity.

Journal entry to correct the 2017 failure to accrue salaries and wages:

Date	Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
	Salaries and Wages Expense			10,000
		Salaries and Wages Payable			10,000
	(Record accrued salaries and wages expense)

Table (7)

Description:

Salaries and Wages Expense is an expense account. Since expenses decrease equity, equity value is decreased, and a decrease in equity is debited.
Salaries and Wages Payable is a liability account. Since the liability to pay salaries and wages expense has increased, liability increased, and an increase in liability is credited.

2.

To determine

Prepare correct journal entries for Company S, if the errors are discovered after the books are closed, at the end of 2017.

2.

Expert Solution

Explanation of Solution

Prepare correct journal entries for Company S, if the errors are discovered after the books are closed, at the end of 2017.

a.

Journal entry to correct the failure to record discount on note payable, accumulated depreciation, and interest expense (Refer to Requirement 1-(a) for all the computations):

Date	Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
	Discount on Note Payable			25,939
	Accumulated Depreciation–Building			1,093
	Retained Earnings			5,771
		Building			32,803
	(Record discount on notes payable, accumulated depreciation)

Table (8)

Description:

Discount on Note Payable is a contra-liability account to Notes Payable account. The contra-liability account increased, and an increase in contra-liability is debited with the total of discount of $32,803, less discount of $6,864 amortized in 2020.
Accumulated Depreciation–Building is a contra-asset account. Since the depreciation expense was overstated by $1,093, the accumulated depreciation is also overstated. Hence, the contra-asset account is debited to decrease the expense value.
Retained Earnings is an equity account. Since understatement of $6,864 of interest expense and overstatement of $1,093 of depreciation expense overstated the net income of 2020. Hence, the equity account is debited by the difference of $5,771 to decrease the overstated value.
Building is an asset account. The asset value decreased due to discount, and a decrease in asset is credited.

b.

The error of 2016 overstated inventory would be counterbalanced at the end of 2017.

Journal entry to correct the 2017 overstated inventory:

Date	Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
	Retained Earnings			15,000
		Inventory			15,000
	(Record reduction in overstated inventory and increase in understated cost of goods sold)

Table (9)

Description:

Retained Earnings is an equity account. Since ending inventory in 2017 was overstated, cost of goods sold of 2017 was understated, and hence, revenue is overstated in 2020. The retained earnings account is debited to decrease the overstated equity.
Inventory is an asset account. Since ending inventory in 2017 was overstated, the value of assets increased. The asset account is credited to decrease the overstated asset account.

c.

The errors of 2015 and 2016 un-accrued expenses would be counterbalanced at the end of 2016 and 2017 respectively.

Journal entry to correct the 2017 failure to accrue salaries and wages:

Date	Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
	Retained Earnings			10,000
		Salaries and Wages Payable			10,000
	(Record accrued salaries and wages expense)

Table (10)

Description:

Retained Earnings is an equity account. Since accrued wages were not recorded and wages expense was not included in the computation of net income, the net income of 2017 was overstated. Hence, the equity account is debited to decrease the overstated value.
Salaries and Wages Payable is a liability account. Since the liability to pay salaries and wages expense has increased, liability increased, and an increase in liability is credited.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Answer 4

Question

Chapter 22, Problem 9P

1.

To determine

Prepare correct journal entries for Company S, if the errors are discovered before the books are closed, at the end of 2017.

1.

Expert Solution

Explanation of Solution

Errors: The comparability and consistency of the financial statements decreases when a company records arithmetic mistakes, or errors. Such errors do require adjustments to make the financial information more reliable, and more relevant.

Journal entry: Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Debit and credit rules:

Debit an increase in asset account, increase in expense account, decrease in liability account, and decrease in stockholders’ equity accounts.
Credit decrease in asset account, increase in revenue account, increase in liability account, and increase in stockholders’ equity accounts.

Prepare correct journal entries for Company S, if the errors are discovered before the books are closed, at the end of 2017.

a.

Journal entry to correct the failure to record discount on note payable:

Date	Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
	Discount on Note Payable			32,803
		Building			32,803
	(Record discount on notes payable)

Table (1)

Description:

Discount on Note Payable is a contra-liability account to Notes Payable account. The contra-liability account increased, and an increase in contra-liability is debited.
Building is an asset account. The asset value decreased due to discount, and a decrease in asset is credited.

Working Note 1:

Compute discount on note payable value.

Discount on note payable = {Note payable value–(Note payable value×Present value of $1 at 12% for 1 time period)}=$90,000–($90,000×0.635518)=$90,000–$57,197=$32,803

Journal entry to correct the erroneous depreciation expense:

Date	Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
	Accumulated Depreciation–Building			1,093
		Depreciation Expense–Building			1,093
	(Record reduction in depreciation expense)

Table (2)

Description:

Accumulated Depreciation–Building is a contra-asset account. Since the depreciation expense was overstated by $1,093, the accumulated depreciation is also overstated. Hence, the contra-asset account is debited to decrease the expense value.
Depreciation Expense is an expense account. Since the depreciation expense was overstated by $1,093, the expense account is credited to decrease the expense value.

Working Note 2:

Compute overstated (understated) depreciation expense value (Refer to Working Note 1 for value and computation of discount on note payable).

Overstated (understated)depreciation expense} = {Incorrectly recorded depreciation expense–Correct depreciation expense}=$90,00030 years – ($90,000–$32,903)30 years=$3,000–$1,907=$1,093

Journal entry to correct the failure to record interest expense:

Date	Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
	Interest Expense			6,864
		Discount on Note Payable			6,864
	(Record interest expense on notes payable)

Table (3)

Description:

Interest Expense is an expense account. Since expenses decrease equity, equity value is decreased, and a decrease in equity is debited.
Discount on Note Payable is a contra-liability account to Notes Payable account. The discount is amortized, hence the contra-liability account value decreased, and a decrease in contra-liability is credited.

Working Note 3:

Compute interest expense.

Interest expense = (Building value×Interest rate percentage)=($57,197×12%)=$6,864

b.

Journal entry to correct the 2016overstated inventory:

Date	Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
	Retained Earnings			35,000
		Cost of Goods Sold			35,000
	(Record reduction in overstated retained earnings)

Table (4)

Description:

Retained Earnings is an equity account. Since ending inventory in 2016was overstated, cost of goods sold of 2016 were understated, and hence, revenue is overstated in 2019. The retained earnings account is debited to decrease the overstated equity.
Cost of Goods Sold is an equity account. Since cost of goods sold of 2017 wasoverstated, the expense account is credited to decrease the overstated equity.

Journal entry to correct the 2017 overstated inventory:

Date	Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
	Cost of Goods Sold			15,000
		Inventory			15,000
	(Record reduction in overstated inventory and increase in understated cost of goods sold)

Table (5)

Description:

Cost of Goods Sold is an equity account. Since ending inventory in 2017 was overstated, cost of goods sold of 2017 were understated. The expense account is debited to increase the understated equity.
Inventory is an asset account. Since ending inventory in 2017 was overstated, the value of assets increased. The asset account is credited to decrease the overstated asset account.

c.

Journal entry to correct the 2016 failure to accrue salaries and wages:

Date	Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
	Retained Earnings			18,000
		Salaries and Wages Expense			18,000
	(Record reduction in overstated retained earnings)

Table (6)

Description:

Retained Earnings is an equity account. Since accrued wages were not recorded and wages expense was not included in the computation of net income, the net income of 2016 was overstated. Hence, the equity account is debited to decrease the overstated value.
Salaries and Wages Expense is an equity account. Since salaries and wages expense of $18,000 which belong to 2016 were recorded in 2017, the expenses of 2017 was overstated. The expense account is credited to decrease the overstated equity.

Journal entry to correct the 2017 failure to accrue salaries and wages:

Date	Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
	Salaries and Wages Expense			10,000
		Salaries and Wages Payable			10,000
	(Record accrued salaries and wages expense)

Table (7)

Description:

Salaries and Wages Expense is an expense account. Since expenses decrease equity, equity value is decreased, and a decrease in equity is debited.
Salaries and Wages Payable is a liability account. Since the liability to pay salaries and wages expense has increased, liability increased, and an increase in liability is credited.

2.

To determine

Prepare correct journal entries for Company S, if the errors are discovered after the books are closed, at the end of 2017.

2.

Expert Solution

Explanation of Solution

Prepare correct journal entries for Company S, if the errors are discovered after the books are closed, at the end of 2017.

a.

Journal entry to correct the failure to record discount on note payable, accumulated depreciation, and interest expense (Refer to Requirement 1-(a) for all the computations):

Date	Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
	Discount on Note Payable			25,939
	Accumulated Depreciation–Building			1,093
	Retained Earnings			5,771
		Building			32,803
	(Record discount on notes payable, accumulated depreciation)

Table (8)

Description:

Discount on Note Payable is a contra-liability account to Notes Payable account. The contra-liability account increased, and an increase in contra-liability is debited with the total of discount of $32,803, less discount of $6,864 amortized in 2020.
Accumulated Depreciation–Building is a contra-asset account. Since the depreciation expense was overstated by $1,093, the accumulated depreciation is also overstated. Hence, the contra-asset account is debited to decrease the expense value.
Retained Earnings is an equity account. Since understatement of $6,864 of interest expense and overstatement of $1,093 of depreciation expense overstated the net income of 2020. Hence, the equity account is debited by the difference of $5,771 to decrease the overstated value.
Building is an asset account. The asset value decreased due to discount, and a decrease in asset is credited.

b.

The error of 2016 overstated inventory would be counterbalanced at the end of 2017.

Journal entry to correct the 2017 overstated inventory:

Date	Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
	Retained Earnings			15,000
		Inventory			15,000
	(Record reduction in overstated inventory and increase in understated cost of goods sold)

Table (9)

Description:

Retained Earnings is an equity account. Since ending inventory in 2017 was overstated, cost of goods sold of 2017 was understated, and hence, revenue is overstated in 2020. The retained earnings account is debited to decrease the overstated equity.
Inventory is an asset account. Since ending inventory in 2017 was overstated, the value of assets increased. The asset account is credited to decrease the overstated asset account.

c.

The errors of 2015 and 2016 un-accrued expenses would be counterbalanced at the end of 2016 and 2017 respectively.

Journal entry to correct the 2017 failure to accrue salaries and wages:

Date	Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
	Retained Earnings			10,000
		Salaries and Wages Payable			10,000
	(Record accrued salaries and wages expense)

Table (10)

Description:

Retained Earnings is an equity account. Since accrued wages were not recorded and wages expense was not included in the computation of net income, the net income of 2017 was overstated. Hence, the equity account is debited to decrease the overstated value.
Salaries and Wages Payable is a liability account. Since the liability to pay salaries and wages expense has increased, liability increased, and an increase in liability is credited.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Answer 5

Chapter 22, Problem 9P

1.

To determine

Prepare correct journal entries for Company S, if the errors are discovered before the books are closed, at the end of 2017.

1.

Expert Solution

Explanation of Solution

Errors: The comparability and consistency of the financial statements decreases when a company records arithmetic mistakes, or errors. Such errors do require adjustments to make the financial information more reliable, and more relevant.

Journal entry: Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Debit and credit rules:

Debit an increase in asset account, increase in expense account, decrease in liability account, and decrease in stockholders’ equity accounts.
Credit decrease in asset account, increase in revenue account, increase in liability account, and increase in stockholders’ equity accounts.

Prepare correct journal entries for Company S, if the errors are discovered before the books are closed, at the end of 2017.

a.

Journal entry to correct the failure to record discount on note payable:

Date	Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
	Discount on Note Payable			32,803
		Building			32,803
	(Record discount on notes payable)

Table (1)

Description:

Discount on Note Payable is a contra-liability account to Notes Payable account. The contra-liability account increased, and an increase in contra-liability is debited.
Building is an asset account. The asset value decreased due to discount, and a decrease in asset is credited.

Working Note 1:

Compute discount on note payable value.

Discount on note payable = {Note payable value–(Note payable value×Present value of $1 at 12% for 1 time period)}=$90,000–($90,000×0.635518)=$90,000–$57,197=$32,803

Journal entry to correct the erroneous depreciation expense:

Date	Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
	Accumulated Depreciation–Building			1,093
		Depreciation Expense–Building			1,093
	(Record reduction in depreciation expense)

Table (2)

Description:

Accumulated Depreciation–Building is a contra-asset account. Since the depreciation expense was overstated by $1,093, the accumulated depreciation is also overstated. Hence, the contra-asset account is debited to decrease the expense value.
Depreciation Expense is an expense account. Since the depreciation expense was overstated by $1,093, the expense account is credited to decrease the expense value.

Working Note 2:

Compute overstated (understated) depreciation expense value (Refer to Working Note 1 for value and computation of discount on note payable).

Overstated (understated)depreciation expense} = {Incorrectly recorded depreciation expense–Correct depreciation expense}=$90,00030 years – ($90,000–$32,903)30 years=$3,000–$1,907=$1,093

Journal entry to correct the failure to record interest expense:

Date	Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
	Interest Expense			6,864
		Discount on Note Payable			6,864
	(Record interest expense on notes payable)

Table (3)

Description:

Interest Expense is an expense account. Since expenses decrease equity, equity value is decreased, and a decrease in equity is debited.
Discount on Note Payable is a contra-liability account to Notes Payable account. The discount is amortized, hence the contra-liability account value decreased, and a decrease in contra-liability is credited.

Working Note 3:

Compute interest expense.

Interest expense = (Building value×Interest rate percentage)=($57,197×12%)=$6,864

b.

Journal entry to correct the 2016overstated inventory:

Date	Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
	Retained Earnings			35,000
		Cost of Goods Sold			35,000
	(Record reduction in overstated retained earnings)

Table (4)

Description:

Retained Earnings is an equity account. Since ending inventory in 2016was overstated, cost of goods sold of 2016 were understated, and hence, revenue is overstated in 2019. The retained earnings account is debited to decrease the overstated equity.
Cost of Goods Sold is an equity account. Since cost of goods sold of 2017 wasoverstated, the expense account is credited to decrease the overstated equity.

Journal entry to correct the 2017 overstated inventory:

Date	Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
	Cost of Goods Sold			15,000
		Inventory			15,000
	(Record reduction in overstated inventory and increase in understated cost of goods sold)

Table (5)

Description:

Cost of Goods Sold is an equity account. Since ending inventory in 2017 was overstated, cost of goods sold of 2017 were understated. The expense account is debited to increase the understated equity.
Inventory is an asset account. Since ending inventory in 2017 was overstated, the value of assets increased. The asset account is credited to decrease the overstated asset account.

c.

Journal entry to correct the 2016 failure to accrue salaries and wages:

Date	Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
	Retained Earnings			18,000
		Salaries and Wages Expense			18,000
	(Record reduction in overstated retained earnings)

Table (6)

Description:

Retained Earnings is an equity account. Since accrued wages were not recorded and wages expense was not included in the computation of net income, the net income of 2016 was overstated. Hence, the equity account is debited to decrease the overstated value.
Salaries and Wages Expense is an equity account. Since salaries and wages expense of $18,000 which belong to 2016 were recorded in 2017, the expenses of 2017 was overstated. The expense account is credited to decrease the overstated equity.

Journal entry to correct the 2017 failure to accrue salaries and wages:

Date	Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
	Salaries and Wages Expense			10,000
		Salaries and Wages Payable			10,000
	(Record accrued salaries and wages expense)

Table (7)

Description:

Salaries and Wages Expense is an expense account. Since expenses decrease equity, equity value is decreased, and a decrease in equity is debited.
Salaries and Wages Payable is a liability account. Since the liability to pay salaries and wages expense has increased, liability increased, and an increase in liability is credited.

2.

To determine

Prepare correct journal entries for Company S, if the errors are discovered after the books are closed, at the end of 2017.

2.

Expert Solution

Explanation of Solution

Prepare correct journal entries for Company S, if the errors are discovered after the books are closed, at the end of 2017.

a.

Journal entry to correct the failure to record discount on note payable, accumulated depreciation, and interest expense (Refer to Requirement 1-(a) for all the computations):

Date	Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
	Discount on Note Payable			25,939
	Accumulated Depreciation–Building			1,093
	Retained Earnings			5,771
		Building			32,803
	(Record discount on notes payable, accumulated depreciation)

Table (8)

Description:

Discount on Note Payable is a contra-liability account to Notes Payable account. The contra-liability account increased, and an increase in contra-liability is debited with the total of discount of $32,803, less discount of $6,864 amortized in 2020.
Accumulated Depreciation–Building is a contra-asset account. Since the depreciation expense was overstated by $1,093, the accumulated depreciation is also overstated. Hence, the contra-asset account is debited to decrease the expense value.
Retained Earnings is an equity account. Since understatement of $6,864 of interest expense and overstatement of $1,093 of depreciation expense overstated the net income of 2020. Hence, the equity account is debited by the difference of $5,771 to decrease the overstated value.
Building is an asset account. The asset value decreased due to discount, and a decrease in asset is credited.

b.

The error of 2016 overstated inventory would be counterbalanced at the end of 2017.

Journal entry to correct the 2017 overstated inventory:

Date	Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
	Retained Earnings			15,000
		Inventory			15,000
	(Record reduction in overstated inventory and increase in understated cost of goods sold)

Table (9)

Description:

Retained Earnings is an equity account. Since ending inventory in 2017 was overstated, cost of goods sold of 2017 was understated, and hence, revenue is overstated in 2020. The retained earnings account is debited to decrease the overstated equity.
Inventory is an asset account. Since ending inventory in 2017 was overstated, the value of assets increased. The asset account is credited to decrease the overstated asset account.

c.

The errors of 2015 and 2016 un-accrued expenses would be counterbalanced at the end of 2016 and 2017 respectively.

Journal entry to correct the 2017 failure to accrue salaries and wages:

Date	Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
	Retained Earnings			10,000
		Salaries and Wages Payable			10,000
	(Record accrued salaries and wages expense)

Table (10)

Description:

Retained Earnings is an equity account. Since accrued wages were not recorded and wages expense was not included in the computation of net income, the net income of 2017 was overstated. Hence, the equity account is debited to decrease the overstated value.
Salaries and Wages Payable is a liability account. Since the liability to pay salaries and wages expense has increased, liability increased, and an increase in liability is credited.

Answer 6

Chapter 22, Problem 9P

1.

To determine

Prepare correct journal entries for Company S, if the errors are discovered before the books are closed, at the end of 2017.

1.

Expert Solution

Explanation of Solution

Errors: The comparability and consistency of the financial statements decreases when a company records arithmetic mistakes, or errors. Such errors do require adjustments to make the financial information more reliable, and more relevant.

Journal entry: Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Debit and credit rules:

Debit an increase in asset account, increase in expense account, decrease in liability account, and decrease in stockholders’ equity accounts.
Credit decrease in asset account, increase in revenue account, increase in liability account, and increase in stockholders’ equity accounts.

Prepare correct journal entries for Company S, if the errors are discovered before the books are closed, at the end of 2017.

a.

Journal entry to correct the failure to record discount on note payable:

Date	Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
	Discount on Note Payable			32,803
		Building			32,803
	(Record discount on notes payable)

Table (1)

Description:

Discount on Note Payable is a contra-liability account to Notes Payable account. The contra-liability account increased, and an increase in contra-liability is debited.
Building is an asset account. The asset value decreased due to discount, and a decrease in asset is credited.

Working Note 1:

Compute discount on note payable value.

Discount on note payable = {Note payable value–(Note payable value×Present value of $1 at 12% for 1 time period)}=$90,000–($90,000×0.635518)=$90,000–$57,197=$32,803

Journal entry to correct the erroneous depreciation expense:

Date	Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
	Accumulated Depreciation–Building			1,093
		Depreciation Expense–Building			1,093
	(Record reduction in depreciation expense)

Table (2)

Description:

Accumulated Depreciation–Building is a contra-asset account. Since the depreciation expense was overstated by $1,093, the accumulated depreciation is also overstated. Hence, the contra-asset account is debited to decrease the expense value.
Depreciation Expense is an expense account. Since the depreciation expense was overstated by $1,093, the expense account is credited to decrease the expense value.

Working Note 2:

Compute overstated (understated) depreciation expense value (Refer to Working Note 1 for value and computation of discount on note payable).

Overstated (understated)depreciation expense} = {Incorrectly recorded depreciation expense–Correct depreciation expense}=$90,00030 years – ($90,000–$32,903)30 years=$3,000–$1,907=$1,093

Journal entry to correct the failure to record interest expense:

Date	Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
	Interest Expense			6,864
		Discount on Note Payable			6,864
	(Record interest expense on notes payable)

Table (3)

Description:

Interest Expense is an expense account. Since expenses decrease equity, equity value is decreased, and a decrease in equity is debited.
Discount on Note Payable is a contra-liability account to Notes Payable account. The discount is amortized, hence the contra-liability account value decreased, and a decrease in contra-liability is credited.

Working Note 3:

Compute interest expense.

Interest expense = (Building value×Interest rate percentage)=($57,197×12%)=$6,864

b.

Journal entry to correct the 2016overstated inventory:

Date	Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
	Retained Earnings			35,000
		Cost of Goods Sold			35,000
	(Record reduction in overstated retained earnings)

Table (4)

Description:

Retained Earnings is an equity account. Since ending inventory in 2016was overstated, cost of goods sold of 2016 were understated, and hence, revenue is overstated in 2019. The retained earnings account is debited to decrease the overstated equity.
Cost of Goods Sold is an equity account. Since cost of goods sold of 2017 wasoverstated, the expense account is credited to decrease the overstated equity.

Journal entry to correct the 2017 overstated inventory:

Date	Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
	Cost of Goods Sold			15,000
		Inventory			15,000
	(Record reduction in overstated inventory and increase in understated cost of goods sold)

Table (5)

Description:

Cost of Goods Sold is an equity account. Since ending inventory in 2017 was overstated, cost of goods sold of 2017 were understated. The expense account is debited to increase the understated equity.
Inventory is an asset account. Since ending inventory in 2017 was overstated, the value of assets increased. The asset account is credited to decrease the overstated asset account.

c.

Journal entry to correct the 2016 failure to accrue salaries and wages:

Date	Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
	Retained Earnings			18,000
		Salaries and Wages Expense			18,000
	(Record reduction in overstated retained earnings)

Table (6)

Description:

Retained Earnings is an equity account. Since accrued wages were not recorded and wages expense was not included in the computation of net income, the net income of 2016 was overstated. Hence, the equity account is debited to decrease the overstated value.
Salaries and Wages Expense is an equity account. Since salaries and wages expense of $18,000 which belong to 2016 were recorded in 2017, the expenses of 2017 was overstated. The expense account is credited to decrease the overstated equity.

Journal entry to correct the 2017 failure to accrue salaries and wages:

Date	Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
	Salaries and Wages Expense			10,000
		Salaries and Wages Payable			10,000
	(Record accrued salaries and wages expense)

Table (7)

Description:

Salaries and Wages Expense is an expense account. Since expenses decrease equity, equity value is decreased, and a decrease in equity is debited.
Salaries and Wages Payable is a liability account. Since the liability to pay salaries and wages expense has increased, liability increased, and an increase in liability is credited.

Answer 7

Chapter 22, Problem 9P

1.

To determine

Prepare correct journal entries for Company S, if the errors are discovered before the books are closed, at the end of 2017.

Answer 8

1.

Expert Solution

Explanation of Solution

Errors: The comparability and consistency of the financial statements decreases when a company records arithmetic mistakes, or errors. Such errors do require adjustments to make the financial information more reliable, and more relevant.

Journal entry: Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Debit and credit rules:

Debit an increase in asset account, increase in expense account, decrease in liability account, and decrease in stockholders’ equity accounts.
Credit decrease in asset account, increase in revenue account, increase in liability account, and increase in stockholders’ equity accounts.

Prepare correct journal entries for Company S, if the errors are discovered before the books are closed, at the end of 2017.

a.

Journal entry to correct the failure to record discount on note payable:

Date	Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
	Discount on Note Payable			32,803
		Building			32,803
	(Record discount on notes payable)

Table (1)

Description:

Discount on Note Payable is a contra-liability account to Notes Payable account. The contra-liability account increased, and an increase in contra-liability is debited.
Building is an asset account. The asset value decreased due to discount, and a decrease in asset is credited.

Working Note 1:

Compute discount on note payable value.

Discount on note payable = {Note payable value–(Note payable value×Present value of $1 at 12% for 1 time period)}=$90,000–($90,000×0.635518)=$90,000–$57,197=$32,803

Journal entry to correct the erroneous depreciation expense:

Date	Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
	Accumulated Depreciation–Building			1,093
		Depreciation Expense–Building			1,093
	(Record reduction in depreciation expense)

Table (2)

Description:

Accumulated Depreciation–Building is a contra-asset account. Since the depreciation expense was overstated by $1,093, the accumulated depreciation is also overstated. Hence, the contra-asset account is debited to decrease the expense value.
Depreciation Expense is an expense account. Since the depreciation expense was overstated by $1,093, the expense account is credited to decrease the expense value.

Working Note 2:

Compute overstated (understated) depreciation expense value (Refer to Working Note 1 for value and computation of discount on note payable).

Overstated (understated)depreciation expense} = {Incorrectly recorded depreciation expense–Correct depreciation expense}=$90,00030 years – ($90,000–$32,903)30 years=$3,000–$1,907=$1,093

Journal entry to correct the failure to record interest expense:

Date	Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
	Interest Expense			6,864
		Discount on Note Payable			6,864
	(Record interest expense on notes payable)

Table (3)

Description:

Interest Expense is an expense account. Since expenses decrease equity, equity value is decreased, and a decrease in equity is debited.
Discount on Note Payable is a contra-liability account to Notes Payable account. The discount is amortized, hence the contra-liability account value decreased, and a decrease in contra-liability is credited.

Working Note 3:

Compute interest expense.

Interest expense = (Building value×Interest rate percentage)=($57,197×12%)=$6,864

b.

Journal entry to correct the 2016overstated inventory:

Date	Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
	Retained Earnings			35,000
		Cost of Goods Sold			35,000
	(Record reduction in overstated retained earnings)

Table (4)

Description:

Retained Earnings is an equity account. Since ending inventory in 2016was overstated, cost of goods sold of 2016 were understated, and hence, revenue is overstated in 2019. The retained earnings account is debited to decrease the overstated equity.
Cost of Goods Sold is an equity account. Since cost of goods sold of 2017 wasoverstated, the expense account is credited to decrease the overstated equity.

Journal entry to correct the 2017 overstated inventory:

Date	Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
	Cost of Goods Sold			15,000
		Inventory			15,000
	(Record reduction in overstated inventory and increase in understated cost of goods sold)

Table (5)

Description:

Cost of Goods Sold is an equity account. Since ending inventory in 2017 was overstated, cost of goods sold of 2017 were understated. The expense account is debited to increase the understated equity.
Inventory is an asset account. Since ending inventory in 2017 was overstated, the value of assets increased. The asset account is credited to decrease the overstated asset account.

c.

Journal entry to correct the 2016 failure to accrue salaries and wages:

Date	Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
	Retained Earnings			18,000
		Salaries and Wages Expense			18,000
	(Record reduction in overstated retained earnings)

Table (6)

Description:

Retained Earnings is an equity account. Since accrued wages were not recorded and wages expense was not included in the computation of net income, the net income of 2016 was overstated. Hence, the equity account is debited to decrease the overstated value.
Salaries and Wages Expense is an equity account. Since salaries and wages expense of $18,000 which belong to 2016 were recorded in 2017, the expenses of 2017 was overstated. The expense account is credited to decrease the overstated equity.

Journal entry to correct the 2017 failure to accrue salaries and wages:

Date	Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
	Salaries and Wages Expense			10,000
		Salaries and Wages Payable			10,000
	(Record accrued salaries and wages expense)

Table (7)

Description:

Salaries and Wages Expense is an expense account. Since expenses decrease equity, equity value is decreased, and a decrease in equity is debited.
Salaries and Wages Payable is a liability account. Since the liability to pay salaries and wages expense has increased, liability increased, and an increase in liability is credited.

Answer 9

1.

Expert Solution

Answer 10

1.

Expert Solution

Answer 11

Expert Solution

Answer 12

2.

To determine

Prepare correct journal entries for Company S, if the errors are discovered after the books are closed, at the end of 2017.

2.

Expert Solution

Explanation of Solution

Prepare correct journal entries for Company S, if the errors are discovered after the books are closed, at the end of 2017.

a.

Journal entry to correct the failure to record discount on note payable, accumulated depreciation, and interest expense (Refer to Requirement 1-(a) for all the computations):

Date	Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
	Discount on Note Payable			25,939
	Accumulated Depreciation–Building			1,093
	Retained Earnings			5,771
		Building			32,803
	(Record discount on notes payable, accumulated depreciation)

Table (8)

Description:

Discount on Note Payable is a contra-liability account to Notes Payable account. The contra-liability account increased, and an increase in contra-liability is debited with the total of discount of $32,803, less discount of $6,864 amortized in 2020.
Accumulated Depreciation–Building is a contra-asset account. Since the depreciation expense was overstated by $1,093, the accumulated depreciation is also overstated. Hence, the contra-asset account is debited to decrease the expense value.
Retained Earnings is an equity account. Since understatement of $6,864 of interest expense and overstatement of $1,093 of depreciation expense overstated the net income of 2020. Hence, the equity account is debited by the difference of $5,771 to decrease the overstated value.
Building is an asset account. The asset value decreased due to discount, and a decrease in asset is credited.

b.

The error of 2016 overstated inventory would be counterbalanced at the end of 2017.

Journal entry to correct the 2017 overstated inventory:

Date	Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
	Retained Earnings			15,000
		Inventory			15,000
	(Record reduction in overstated inventory and increase in understated cost of goods sold)

Table (9)

Description:

Retained Earnings is an equity account. Since ending inventory in 2017 was overstated, cost of goods sold of 2017 was understated, and hence, revenue is overstated in 2020. The retained earnings account is debited to decrease the overstated equity.
Inventory is an asset account. Since ending inventory in 2017 was overstated, the value of assets increased. The asset account is credited to decrease the overstated asset account.

c.

The errors of 2015 and 2016 un-accrued expenses would be counterbalanced at the end of 2016 and 2017 respectively.

Journal entry to correct the 2017 failure to accrue salaries and wages:

Date	Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
	Retained Earnings			10,000
		Salaries and Wages Payable			10,000
	(Record accrued salaries and wages expense)

Table (10)

Description:

Retained Earnings is an equity account. Since accrued wages were not recorded and wages expense was not included in the computation of net income, the net income of 2017 was overstated. Hence, the equity account is debited to decrease the overstated value.
Salaries and Wages Payable is a liability account. Since the liability to pay salaries and wages expense has increased, liability increased, and an increase in liability is credited.

Answer 13

2.

To determine

Prepare correct journal entries for Company S, if the errors are discovered after the books are closed, at the end of 2017.

Answer 14

2.

Expert Solution

Explanation of Solution

Prepare correct journal entries for Company S, if the errors are discovered after the books are closed, at the end of 2017.

a.

Journal entry to correct the failure to record discount on note payable, accumulated depreciation, and interest expense (Refer to Requirement 1-(a) for all the computations):

Date	Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
	Discount on Note Payable			25,939
	Accumulated Depreciation–Building			1,093
	Retained Earnings			5,771
		Building			32,803
	(Record discount on notes payable, accumulated depreciation)

Table (8)

Description:

Discount on Note Payable is a contra-liability account to Notes Payable account. The contra-liability account increased, and an increase in contra-liability is debited with the total of discount of $32,803, less discount of $6,864 amortized in 2020.
Accumulated Depreciation–Building is a contra-asset account. Since the depreciation expense was overstated by $1,093, the accumulated depreciation is also overstated. Hence, the contra-asset account is debited to decrease the expense value.
Retained Earnings is an equity account. Since understatement of $6,864 of interest expense and overstatement of $1,093 of depreciation expense overstated the net income of 2020. Hence, the equity account is debited by the difference of $5,771 to decrease the overstated value.
Building is an asset account. The asset value decreased due to discount, and a decrease in asset is credited.

b.

The error of 2016 overstated inventory would be counterbalanced at the end of 2017.

Journal entry to correct the 2017 overstated inventory:

Date	Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
	Retained Earnings			15,000
		Inventory			15,000
	(Record reduction in overstated inventory and increase in understated cost of goods sold)

Table (9)

Description:

Retained Earnings is an equity account. Since ending inventory in 2017 was overstated, cost of goods sold of 2017 was understated, and hence, revenue is overstated in 2020. The retained earnings account is debited to decrease the overstated equity.
Inventory is an asset account. Since ending inventory in 2017 was overstated, the value of assets increased. The asset account is credited to decrease the overstated asset account.

c.

The errors of 2015 and 2016 un-accrued expenses would be counterbalanced at the end of 2016 and 2017 respectively.

Journal entry to correct the 2017 failure to accrue salaries and wages:

Date	Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
	Retained Earnings			10,000
		Salaries and Wages Payable			10,000
	(Record accrued salaries and wages expense)

Table (10)

Description:

Retained Earnings is an equity account. Since accrued wages were not recorded and wages expense was not included in the computation of net income, the net income of 2017 was overstated. Hence, the equity account is debited to decrease the overstated value.
Salaries and Wages Payable is a liability account. Since the liability to pay salaries and wages expense has increased, liability increased, and an increase in liability is credited.