Question

Krafty Kris, Inc., discovered the following errors after the 2017 financial statements were issued: a. A major supplier shipped inventory valued at $8,550 to Krafty Kris on consignment. This merchandise was mistakenly included in the inventory taken by Krafty Kris on December 31, 2016. (Goods shipped on consignment are the property of the consignor and should not have been included in Krafty Kris's inventory.) b. Krafty Kris renewed its liability insurance policy on October 1, 2016, paying a $36,000 premium and debiting Insurance expense. No further entries have been made. The pre- mium purchased insurance coverage for a period of 36 months. c. Repair expense was debited at the time equipment was purchased for $100,000 on January 1, 2017. The equipment has a life of five years; its salvage value is considered immaterial. Krafty uses straight-line depreciation method. Required: 1. Prepare a journal entry to correct these errors. Ignore income taxes. 2. If these errors were to remain uncorrected, what would be the effects on the 2018 finan- cial statements issued by Krafty Kris, Inc.?

How would I prepare a journal entry to correct these errors only using B?

Answer 1

	Krafty Kris Inc.,
Q1	Rectification entries
Date	Account Titles	Debit	Credit
31.12.2017	Supplier A/c	8,550.00
	Inventory (Supplies)		8,550.00
	(To rectify inventory received on consignment wrongly recorded in the books) - Note_1
31.12.2017	Insurance Expenses A/c	12,000.00
	Prepaid Insurance A/c		12,000.00
	(To record insurance expenses for the year 2017) - Note_2
31.12.2017	Machinery A/c	100,000.00
	Repair Expenses A/c		100,000.00
	(To capitalise expenses wrongly booked in revenue expenses)
31.12.2017	Depreciation A/c	20,000.00
	Machinery A/c		20,000.00
	(To record depreciation expenses for one year)
Note_1	Closing Inventory for the year ended 31.12.2016 has been overstated as a result of this error. Opening inventory for the year 2017 has been understated. Cumulative impact on two years financial statements would be zero. But, individual impact on each of the financial years have to corrected. Rectification entries for the year 2017 have only been shown in the above entries.
Note_2	In the year 2016, rectification entry has to be passed as follows
		Debit	Credit
	Prepaid Insurance A/c	33,000.00
	Insurance		33,000.00
Q2	If the above errors remain uncorrected_ impacts on 2018 Financials
Error_1	There will be no impact on F.Y. 2018 financial statements, as closing inventory of the year 2016 will be overstated and 2017 opening inventory will be overstated. Impact of the error would be nullified at the end of F.Y.2017, therefore there is no impact on financial statements of F.Y. 2018.
Error_2	If the error remains uncorrected, profits for the F.Y.2018 would be overstated by $ 12000, as insurance expenses would be short debited by $ 12000
Error_3	If the error remains uncorrected, profits for the F.Y.2018 would be overstated by $ 20000, as depreciation expenses would be short debited by $ 20000