Question

Instructions X The following are independent errors made by a company that uses the periodic inventory system: a. Goods in transit, purchased on credit and shipped FOB destination, $10,000, were included in purchases but not in the physical count of ending inventory b. Purchase of a machine for $2,000 was expensed. The machine has a 4-year life, no residual value, and straightline depreciation is used. C. Wages payable of $2,000 were not accrued. d. Payment of next year's rent, $4,000, was recorded as rent expense. e. Allowance for doubtful accounts of $5,000 was not recorded. The company normally uses the aging method. f. Equipment with a book value of $70,000 and a fair value of $100,000 was sold at the beginning of the year. A 2-year, non-interest-bearing note for $129,960 was received and recorded at its face value, and a gain of $59,960 was recognized. No interest revenue was recorded and 14% is a fair rate of interest Required: 1. Next Level Indicate the effect of each of the preceding errors on the company's assets, liabilities, shareholders' equity, and net income in the year in which the error occurs. State whether the error causes an overstatement (+), an understatement (-), or no effect (NE). 2. Prepare the correcting journal entry or entries required at the beginning of the year for each of the preceding errors, assuming the company discovers the error in the year after it was made. Ignore income taxes.

Answer 1

Solution:

Date	Particulars	Amount ($)	Amount ($)
a)	Closing Stock A/c Dr.	10,000
	To Trading A/c		10,000
	(For goods now counted in closing Stock)
b)	Machinery A/c Dr.	2,000
	To Cash A/c		2,000
	(For Machinery Purchased)
c)	Wages A/c Dr.	2,000
	To outstanding Wages A/c		2,000
	(for unpaid wages)
d)	Prepaid Rent A/c Dr.	4,000
	To Rent A/c		4,000
	(For payment of next year rent)
e)	Bad debts A/c Dr.	5,000
	To Allowance for doubtful accounts		5,000
	(For allowancefor doubtful accounts recorded)
f)1	Cash A/c Dr.	70,000
	To Equipment A/c		70,000
	(For Equipment Sold)
	Bank A/c Dr.	129,960
	To Note Payable A/c		129,960
	(For non-interest bearing note payable received
f)2	Interest on Note Payable A/c Dr.	18194.4
	To Note Payable A/c		18194.4
	(For interest related to note payable)