Question

Additional Problem 10

The following errors were discovered on the books of Ivanhoe Inc., during the preparation of the 2020 financial statements, prior to the books being closed for the year.

(a)		$13,700 of goods held on consignment from Stevens Co were counted as part of Ivanhoe’s inventory at the end of fiscal 2019. The goods were not sold during fiscal 2020, and were returned to Stevens Co. They were not part of the fiscal 2020 year-end inventory count. Assume a perpetual inventory system in this case.
(b)		Goods worth $22,500 were shipped FOB destination on December 29, 2019 and were received by the customer on January 5, 2020. Revenue was recorded in fiscal 2019, when the goods were shipped. Assume a periodic inventory system is being used in this case. The goods shipped were included in the ending inventory count in 2019.
(c)		During the first week of January 2018, equipment was purchased for $19,800. The entire purchase was recorded with a debit to Repairs and Maintenance Expense, and a credit to cash. At the time of purchase, Ivanhoe expected to keep the equipment for four years, and then to sell it for $3,960. Ivanhoe uses the straight-line method of depreciation for equipment.

Prepare the journal entries required to correct the above errors, assuming that Ivanhoe follows IFRS. Ignore income tax for this problem.

(To correct for prior year error and record current year depreciation.)

Answer 1

a) under Perpetual inventory method, all purchases and sales are recorded directly under "Inventory" account. Thus, goods received on consignment were recorded in Ivanhole's inventory account in year 2019. So, return in year 2020 also has to be recorded under inventory account accordingly. Entry in year 2020 will be as follows:

Dr. Accounts Payable - Stevens Co 13,700

Cr. Inventory 13,700

(Being goods purchased on consignment returned to consignor)

b) Under Periodic Inventory method, Sales are accounted under "Sales account" & Purchases under "Purchase" account. Thus, Inventory balance will not have impact of purchases and sales. In order to match the inventory against net of purchases and sales, account named as "cost of goods sold" to be entered. Moreover in the said example, Sales/Revenue had been recorded in year 2019 Cost of goods sold was not recorded, thus ended up in overstatement of profit in year 2019. Since year 2019 had been closed, corresponding prior period adjustment entry has to be made in year 2020 with "Retained earnings account". Once year had been closed, "income statement" ledgers should not be used, because balances of previous year already posted to "balance sheet ledgers" Thus, Accounting entry in year 2020 will be:

Dr. Retained Earnings a/c 22,500

Cr. Inventory a/c 22,500

(Being cost of goods sold pertaining to year 2019 accounted in current year)

c) Asset purchased in year 2018 and incorrectly accounted under expense account. Since year 2018 had been closed, we need to adjust this expense under "Retained earnings" account of year 2020. Thus entry in year 2020 will be:

Dr. Equipment 19,800

Cr. Retained Earnings 19,800

(being asset purchased in year 2018 incorrectly accounted under Expenses have been rectified)

To record Depreciation, prior period depreciation has to be accounted under "Retained earnings" account instead of "Depreciation expense" account:

Depreciation per year under Straight line method = (Asset value less salvage value) divided by number of years estimated to use the asset

= (19800-3960)/4

= $ 3,960 per annum

Depreciation for year 2018 + year 2019 should get accounted under Retained earnings = 3,960 for year 2018+3960 for year 2019 = $ 7,920 should gets recorded under "Retained earnings"

Dr. Retained Earnings a/c 7,920

Cr. Accumulated Depreciation a/c 7,920

(Being depreciation pertains to year 2018& 2019 accounted)

Then, for year 2020, book depreciation under "Expense account"

Dr. Depreciation Expense 3,960

Cr. Accumulated Depreciation a/c 3,960

(Being Depreciation for year 2020 accounted)