Below are three independent and unrelated errors. a. On December 31, 2017, Wolfe
ID: 2533677 • Letter: B
Question
Below are three independent and unrelated errors. a. On December 31, 2017, Wolfe-Bache Corporation failed to accrue office supplies expense of $1,800. In January 2018, when it received the bill from its supplier, Wolfe-Bache made the following entry: Office supplies expense 1,800 Cash 1,800 b. On the last day of 2017, Midwest Importers received a $90,000 prepayment from a tenant for 2018 rent of a building. Midwest recorded the receipt as rent revenue. c. At the end of 2017, Dinkins-Lowery Corporation failed to accrue interest of $8,000 on a note receivable. At the beginning of 2018, when the company received the cash, it was recorded as interest revenue. Required For each error: 1. What would be the effect of each error on the income statement and the balance sheet in the 2017 financial statements? 2. Prepare any jounal entries each company should record in 2018 to correct the errors.Explanation / Answer
Answers
Transaction ‘a’
Office supplies expenses have correctly been recorded as ‘debit’ of $1800. Hence, the income statement would be correct. Cash has been credited while the same has not been paid which will result in under statement of cash balance in balance sheet.
Transaction ‘b’
$90000 is a rental income of 2018. Recording it as Rent revenue of 2017 will result in Over statement of rental income (and net Income) of 2017 by $90,000
Transaction ‘c’
Interest revenue must have been recorded as ‘accrued’ in 2017. Not doing so has resulted in Understatement of Net Income of 2017 by $8000 and over statement of Net Income of 2018 by $8000.
Transaction
Accounts Titles
Debit
Credit
a'
Cash
$ 1,800.00
Accounts Payable
$ 1,800.00
(cash wrongly credited now deited)
b'
Rent Revenue
$ 90,000.00
Unearned rent Revenue
$ 90,000.00
(income wrongly credited, now debited)
c' [in 2017]
Interest receivables
$ 8,000.00
Interest revenue
$ 8,000.00
(accrued interest income recorded)
c' [in 2018]
Cash
$ 8,000.00
Interest receivables
$ 8,000.00
(interest received)
Transaction
Accounts Titles
Debit
Credit
a'
Cash
$ 1,800.00
Accounts Payable
$ 1,800.00
(cash wrongly credited now deited)
b'
Rent Revenue
$ 90,000.00
Unearned rent Revenue
$ 90,000.00
(income wrongly credited, now debited)
c' [in 2017]
Interest receivables
$ 8,000.00
Interest revenue
$ 8,000.00
(accrued interest income recorded)
c' [in 2018]
Cash
$ 8,000.00
Interest receivables
$ 8,000.00
(interest received)
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