Below are three independent and unrelated errors. On December 31, 2017, Wolfe-Ba
ID: 2537374 • Letter: B
Question
Below are three independent and unrelated errors.
On December 31, 2017, Wolfe-Bache Corporation failed to accrue office supplies expense of $1,300. In January 2018, when it received the bill from its supplier, Wolfe-Bache made the following entry:
Office supplies expense 1,300
Cash 1,300
On the last day of 2017, Midwest Importers received a $80,000 prepayment from a tenant for 2018 rent of a building. Midwest recorded the receipt as rent revenue.
At the end of 2017, Dinkins-Lowery Corporation failed to accrue interest of $7,000 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 journal entries each company should record in 2018 to correct the errors.
Explanation / Answer
Answer
Error
Effect on Income Statement 2017
Effect on Balance Sheet 2017
Office Supplies expense not accrued in 2017 of $1300.
Since, expenses are not accrued in 2017, the Net Income will be overstated by amount of $1300
If the Office Supplies expenses have been accrued, the account of Supplies in Balance Sheet would have been recorded at $1300 more.
$80000 received for next year rent (2018), recorded as income in 2017
Revenues will be overstated by $80000 and so will be the Net Income
Retained Earnings will be overstated by $80000. Also if the amount has been correctly recorded, $80000 would be appearing on asset side as ‘Unearned Revenue’
$7000 interest revenue failed to get accrued in 2017
This will lead to a shortfall or understatement of Net Income by $7000
Retained Earnings will be understated by $7000. Accrued interest of $7000 will not be appearing.
Accounts Title
Dr (in $)
Cr (in $)
Retained Earnings
1300
Office Supplies expenses
1300
Retained Earnings
80000
Rent Revenue
80000
Interest Revenue
7000
Retained earnings
7000
Error
Effect on Income Statement 2017
Effect on Balance Sheet 2017
Office Supplies expense not accrued in 2017 of $1300.
Since, expenses are not accrued in 2017, the Net Income will be overstated by amount of $1300
If the Office Supplies expenses have been accrued, the account of Supplies in Balance Sheet would have been recorded at $1300 more.
$80000 received for next year rent (2018), recorded as income in 2017
Revenues will be overstated by $80000 and so will be the Net Income
Retained Earnings will be overstated by $80000. Also if the amount has been correctly recorded, $80000 would be appearing on asset side as ‘Unearned Revenue’
$7000 interest revenue failed to get accrued in 2017
This will lead to a shortfall or understatement of Net Income by $7000
Retained Earnings will be understated by $7000. Accrued interest of $7000 will not be appearing.
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