Below are three independent and unrelated errors. a. On December 31, 2015, Wolfe

Question

Below are three independent and unrelated errors. a. On December 31, 2015, Wolfe-Bache Corporation failed to accrue office supplies expense of $1,550. In January 2016, when it received the bill from its supplier, Wolfe-Bache made the following entry: Office supplies expense 1,550 Cash 1,550 b. On the last day of 2015, Midwest Importers received a $85,000 prepayment from a tenant for 2016 rent of a building. Midwest recorded the receipt as rent revenue c. At the end of 2015 Corporation failed to accrue interest of $7,500 on a note receivable At the beginning of 2016, 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 2015 financial statements? rror a Income Statement Balance Sheet ror Income Statement Balance Sheet ror c Income Statement Balance Sheet 2. Prepare any journal entries each company should record in 2016 to correct the errors. (If no entry is required for a transaction/event, select"No journal entry required" in the first account field.) View transaction list Record correction of office supplies error Record correction of rent received in advance Record correction of interest revenue on note receivable. 1 2 3 Credit Note :·journal entry has been entered Record entry Clear entry View general journal

Explanation / Answer

Error a

Income Statement: Expenses understated, net income overstated.

Balance Sheet: Liabilities understated, retained earnings overstated.

Error b

Income Statement: Revenue overstated, net income overstated.
Balance Sheet: Liabilities understated, retained earnings overstated.

Error c

Income Statement: Revenue understated, net income understated.
Balance Sheet: Assets understated, retained earnings understated.

2. Journal entries each company should record in 2016 to correct the errors

Error a

Retained earnings . ................................................. 1,550
Office supplies expense ................................................... 1,550

Error b

Retained earnings . ................................................... 85,000
Rent revenue . ..................................................................... 85,000

Error c

Interest revenue . ........................................................ 7,500
Retained earnings . .............................................................. 7,500

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