Mastering Correction of Accounting Errors
MASTERING CORRECTION OF ACCOUNTING ERRORS
TESTBANK SOLUTIONS
Section 1WHERE ERRORS OCCUR AND HOW THEY ARE FOUND
1.a.A bank reconciliation should be performed each month when the monthly bank statement is received.
2.a. Because insurance expense for 20X1 was understated, the 20X1 ending balance of retained earnings was also understated. Correcting this error will require a prior period adjustment because the 20X1 books are closed.
3. d.
4. d.This is a slide error because the decimal point was moved left onedecimal place.
5. b.
Section 2THE BANK RECONCILIATION
1.a.The required adjustments to the book balanceare:
– $13 for the bank service charge – $720 for the NSF check =($733) +$72 for the $72 posting error ($870 $798) = $661 reduction in the book balance. Bring the book balance to $16,589.
The $5,280 in outstanding checks and $6 Web Banking service fee areadjustments to the bank balance.
2.d.Because the amount on the NSF check is still on the books, it must bedeductedfrom the ledger Cash account to conform the book balanceto the bank balance.
3.a.This is a bank error, so the adjustment is to add to the bank balancethe amount of the other company’s check.
4.b.This is a bank error,so the adjustment is a deduction fromthe bank balanceof $1,000 for amount mistakenly credited to your account.
5.c.This is a bank errorthat caused the bank balance to betoo low, so the adjustment must add back the$90 mistakenlydeducted.
6.b.This is a book error. Because the ledger Cash balance is $9 lower than it should be,the adjustment must add back $9.
7.a.The bank’s error requires an adjustmentto the bank statement balance that adds back the $2,198 mistakenly deducted.
8.d.These checks are on your books but have not cleared the bank, so the adjustment must reduce the bank balance by the total of the four checks outstanding.
9.c.$7,850 $1,200 checks outstanding + $750 deposits in transit = $7,400 balance per bank.
10.b.The checks on your books have not clearedthe bank, so the adjustment must reduce the bank balance by the total of the checks outstanding.
Section 3FINDING AND CORRECTING ERRORS USING THE UNADJUSTED TRIAL BALANCE
1.c.If the error is a slide, there will be an unreasonable balance.But a difference between total debits and credits of $2,600 is not unreasonable, so it is highly unlikely that this is a slide error. If it is a transposition error, the difference between total debits and creditscan be divided by 9 and $2,600 cannot be.If it is a doubling error, the difference between total debits and credits is divisible by 2, which $2,600 is. A misclassification error would not cause total debits and credits to be unequal.
2.b.An omission error cannot be detected by unequal debits and credits because both totals would be unequal by the same amount. A doubling error can be detected if the difference between total debits and credits is divisible by 2 (not 9). A slide error is the result of one or more zeros being added to or subtracted from a balance, not a 9. Transposition errors can be detected if the difference is divisible by 9. Omission errors and misclassification errors cannot be detected by reviewing the trial balance.
3.a.Because the incorrect amount involved a journal entry in which debits equal credits, this type of error,if correctly posted, cannot be discovered by preparing a trial balance.
4.a.A transposition error will cause debits and credits not to agree and thereforecan be discovered through preparation of a trial balance.
Section 4CORRECTING CURRENT PERIOD ACCRUAL ERRORS
1.c.The credit to the payable (liability) account was for too little, so liabilities will be understated and the debit to theexpenseaccount was also for too little, so that expenseswill beunderstated.
2.c.The required entry involves a debit to Interest Expense and a credit to Interest Payable for $200. To compute: $20,000 × 6% = $1,200 × 2/12 = $200.
3.d.Accrued salaries at the end of the year are $16,000:To compute: $20,000/5 =$4,000 × 4 days = $16,000, not $12,000. Unless a correcting entry is made, expenses will be understated on the income statement so net income and retained earnings will be overstated on the balance sheet.Although it is not one of the possible answers, liabilities (salaries payable) will also be understated on the balance sheet.
4.c. Accrued salaries at the end of the year are $14,000. To compute: $35,000/5 = $7,000 per day × 2 days = $14,000, not $18,000. The correcting entry must debit Salaries Payable and credit Salaries Expense for $4,000.
5.b.Unless Utilities Expense is increased (debited) for the amount of the expense already incurred, expenses will be understated, so both net income and retained earnings will be overstated.Although it is not one of the possible answers, liabilities (Utilities Payable) will also be understated on the balance sheet.
6.c.The correct amount of accrued interest at the end of the year is $750. To compute: ($10,000 × 9% × 10/12). Because the adjusting entry accrued $550 of interest, the correcting entry would be to debit Interest Expense and credit Interest Payable for the additional $200 that needs to be accrued.
7.bThe correct amount of accrued interest at the end of the year is $200 ($20,000 x 6% x 2/12). The entry to accrue the interest for 20X4 will be a debit to Interest Expense and a credit to Interest Payable for $200.
8.dThe correcting entry would involve a debit to Accounts Receivable and a credit to Revenue for $5,000.
Section 5CORRECTING CURRENT PERIOD DEFERRAL ERRORS
1.d. Failing to record interest expense on notes payable is a type of accrual error, as is failing to post revenue earned for which no payment had been received. Debiting Accounts Payable instead of Accounts Receivable is a misclassification error.
2.b.The adjusting entry should have been a debit Supplies Expense and credit Supplies on Hand for $1,300 ($2,000 purchased $700 left at year end). If uncorrected, Supplies Expense will be understated, which will overstate net income. Assets (Supplies on Hand) will be overstated as well.
3.c.The correct amount of insurance expense at the end of 20X8 is $3,750 ($15,000/36 months × 9 months). It was incorrectly recorded at $5,000. The correcting entry would be to debit Prepaid Insurance for $1,250 ($5,000 $3,750) and credit Insurance Expense for $1,250.
4.a.The correct amount of Insurance Expense at the end of 20X8 is $3,000 ($12,000/36 months × 9 months). The correcting entry would be to debit Prepaid Insurance for $1,000 ($4,000 $3,000) and credit Insurance Expense for $1,000. If this entry is not made, expenses will be overstated, thereby understating net income. Total assets will be understated.
5.b.The amount of rent revenue currently recognized is $8,000 ($40,000 $32,000). The correct amount of rent revenue at the end of 20X3 is $16,000 ($8,000 2 months). Therefore, the correct adjusting entry would be to debit Rent Received in Advance and credit Rent Revenue for $8,000. Without this correcting entry, rent revenue (and net income) will be understated, and total liabilities will be overstated.
6.b.The adjusting entry should have been to debit Supplies Expense and credit Supplies on Hand for $1,800. Thus, an additional $600 ($1,800 $1,200) needs to be expensed. The correcting entry involves debiting Supplies Expense and crediting Supplies for $600.
7.a.The correct amount of rent expense for 20X8 is $2,000 ($12,000/36 × 6 months), not $1,000. Therefore, if no correcting is made, Rent Expense will be understated, thereby overstating net income. Assets (Prepaid Rent) will be overstated as well.
8.c.The correct amount of rent expense is $1,250 ($10,000/24 × 3 months). The correcting entry would involve debitingPrepaidRent and crediting RentExpense for $3,750 ($5,000 $1,250).
9.aThe original entry was to debit prepaid insurance for $2,400. The correct amount of insurance expense for 20X8 is $800 ($2,400/12 x 4 months). If no adjusting entry is made to record this amount, Insurance Expense will be understated and net income will be overstated. Assets (Prepaid Insurance) will be overstated as well.
10.b.The original entry made was to debit Insurance Expense and credit Cash for $1,200. The correct amount of insurance expense for the year is $200 ($1,200/12 × 2 months). The correcting entry would be debit Prepaid Insurance and credit Insurance Expense for $1,000 ($1,200 $200).
Testbank Solutions1