Question

King Enterprises is a book wholesaler. King hired a new accounting clerk on January 1 of the current year. The new clerk does not understand accrual accounting and recorded the following transactions based on when cash receipts and disbursements changed hands rather than when the transaction occurred. King uses a perpetual inventory system, and its accounting policy calls for inventory purchases to be recorded net of any discounts offered.

Problem 6.6A Correcting Errors-Recording of Merchandising Transactions (LO6-2, LO6-3, LO6-6) King Enterprises is a book wholesaler. King hired a new accounting clerk on January 1 of the current year. The new clerk does not understand accrual accounting and recorded the following transactions based on when cash receipts and disbursements changed hands rather than when the transaction occurred. King uses a perpetual inventory system, and its accounting policy calls for inventory purchases to be recorded net of any discounts offered. Jan.10 Paid Aztec Enterprises $11,300 for books that it received on December 15. (This purchase was recorded as a debit to Inventory and a credit to Accounts Payable on December 15 of last year, but the accounting clerk ignores that fact.) Dec. 27 Received books from McSaw Inc. for $27,500; terms 2/10, n/30. Dec.30 Sold books to Booksellers Unlimited for $45,000; terms 1/10, n/30. The cost of these books to King was $40,000. Required: a. As a result of the accounting clerk's errors, compute the amount by which the following accounts are overstated or understated. 1. Accounts Receivable 2. Inventory 3. Accounts Payable 4. Sales 5. Cost of Goods Sold b. Compute the amount by which net income is overstated or understated. c. Prepare a single journal entry to correct the errors that the accounting clerk has made. (Assume that King has yet to close its books for the current year.) d. Assume that King has already closed its books for the current year. Make a single journal entry to correct the errors that the accounting clerk has made. e. Assume that the ending inventory balance is correctly stated based on adjustments resulting from a physical inventory count. (Cost of Goods Sold was debited or credited based on the inventory adjustment.) Assume that King has already closed its books for the current year, and make a single journal entry to correct the errors that the accounting clerk has made.

Answer 1

Note: Prepare the following comparative journal entries under cash and accrual systems

Credit Date Jan. 10 Credit Journal Entries Under Cash Basis by Clerk Account Title and Explanation |Debit Inventory $11,300 Cash To record payment for inventory received Journal Entries Under Accrual Basis Account Title and Explanation Debit Accounts Payable $11,300 Date Jan. 10 $11,300 Cash $11.300 To record payment for inventory received Dec. 27 No entry Dec. 27 $26.950 Inventory ($27,500 x (1 - 2%) Accounts Payable To record inventory purchased on account $26.950 Dec. 30 No entry Dec. 30 $45.000 Accounts Receivable Sales Revenue To record inventory sold on account $45.000 Dec. 30 Cost of Goods sold $40.000 Inventory $40,000 To record cost of goods sold

Requirement a1: Accounts receivable understated by $45,000

Requirement a2: Inventory overstated by $24,350

Note:

Particulars	Amount
Inventory debited instead of accounts payable on Jan. 10	($11,300)
Inventory not debited on Dec. 27 ($27,500 × (1 − 2%))	$26,950
Inventory not credited for cost of goods sold	($40,000)
Inventory overstated	($24,350)

Requirement a3: Accounts payable understated by $15,650 ($26,950 − $11,300)

Requirement a4: Sales revenue understated by $45,000

Requirement a4: Cost of goods sold understated by $40,000

Requirement b: Net income understated by $5,000 ($45,000 − $40,000)

Requirement c: Prepare the following journal entries

Date	Account Title and Explanation	Debit	Credit
Dec. 30	Accounts Receivable	$45,000
	Cost of Goods Sold	$40,000
	Sales Revenue		$45,000
	Inventory		$24,350
	Accounts Payable		$15,650
	To correct the error in books

Requirement d: Prepare the following journal entries

Date	Account Title and Explanation	Debit	Credit
Dec. 30	Accounts Receivable	$45,000
	Inventory		$24,350
	Accounts Payable		$15,650
	Retained Earnings ($45,000 − $40,000)		$5,000
	To correct the error in books

Requirement e: Prepare the following journal entries

Date	Account Title and Explanation	Debit	Credit
Dec. 30	Accounts Receivable	$45,000
	Accounts Payable		$15,650
	Retained Earnings ($24,350 + $5,000)		$29,350
	To correct the error in books