Question

Correction of Errors Hinckley Company is in the process of adjusting its books at the end of 20Y3. Hinckley's records reveal the following information: a. Hinckley failed to accrue sales commissions at the end of 20Y1 and 20Y2 as follows: 2011............................................................................... $22,000 2012................................................................................ 14.250 In each case, the sales commissions were paid (and expensed) in January of the following year. e b. Errors in ending inventories for the last three years were discovered to be as follows: 2011.................................................... .. $41,300 understated 2012.... 54,200 overstated 20Y3..... 15,000 understated The incorrect amount has already been recorded for 20Y3

Answer 1

1.

a)

For 20Y1 Sales commission , no adjustment required entry required

For 20Y2 sales commission the following entry:-

31/12/2013

Retained Earning Dr. 14,250

Sales & Commission Dr. 14,250

(Being the sales commission for the 20Y2 which was not accrued but paid and booked in 2013 as expenses, correction to make as prior period adjustment )

b)

For the 20Y1 & 20Y2 the adjustments in the inventory values to be done against Retained earning and For 20Y3 the adjustment in the inventory value to be done against P& Loss account

For 20Y1 & 20Y2 - Pass one entry for adjusting the Net effect :-

Inventory A/C Dr. 37,100 (41,300-4200)

Retained Earning A/C Cr.   37,100 (41,300-4200)

(Being the prior years Net adjustment for the overstatement & understatement of inventory for 20Y1 & 20Y2 respectively )

For 20Y3

Inventory A/C Dr. 15,000

Profit & Loss A/C Cr. 15,000

(Being correction entry for the inventory understatement for the year )

2.

Hinckely Company
Statement of Retained Earning
For the year Ended 20Y3		$
Retnained earning as per previous report as on 01/01/20Y3		1,265,000
Prior year correction adjustmnets
Less :-Sales commission for 20Y2	-14,250
Add – Inventory Net understatment	37,200
Total adjustments		22,950
Reteined Earning opening After Prior year adjustments		1,287,950
Net income ( Un adjustment for 20Y3	300,000
Add Inventory understatement	15,000
Add Sales commission Booked in 20Y3 belong to 20Y2	14,250
Total Adjusted Net Income for 20Y3		329,250
Less Dividend paid		-175,000
Retained Earning Balance as of 31-12-20Y3		1,442,200