chapter 6 correction of errors [i]: errors not …proxy.flss.edu.hk/~flssmcwong/s5 notes/chapter...

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Chapter 6 Correction of Errors [I]: Errors Not Affecting Trial Balance Agreement

6.1 Introduction Both the trial balance and the control accounts are used to test the arithmetical accuracy of entries (運算準確性) and as an

internal control mechanism in accounting. However, some errors would not affect trial balance agreement (不影響試算表的平

衡) and thus cannot be detected by a trial balance (不能靠試算表檢查出來).

6.2 Error of commission (帳名調亂錯誤) An error of commission is where an entry has been made in a wrong account of the same type (交易錯誤記錄在同一類別的另

一個帳戶). For example, if a trade debtor, P Lau, paid us $500 by cheque on 18 May 2010 but the receipt was wrongly credited to P

Lee’s account, instead of P Lau’s account. This type of error is called an error of commission. The error in the above example would not affect the agreement of a trial balance (不影響試算表的平衡), as both the debit and

credit entries were of the same amount (因為借方和貸方記帳的金額相同). To correct errors in ledger accounts, we first need to

record the correcting entries in the journal (在日記簿作更正分錄) and then post the entries to the ledger accounts (把更正分錄

過帳到分類帳帳戶內). If the error was found on 31 May 2010, the error should be corrected as follows:

Step 1 Record the correcting entries in the journal (第一步在日記簿作更正分錄)

Journal Date Details Dr Cr 2010 $ $ May 31 P Lee 500

P Lau 500 Correction of error: Receipt from P Lau wrongly posted to P Lee’s account

Step 2 Post the correcting entries to the ledger accounts (第二步把更正分錄過帳到分類帳帳戶內) Accounts Receivable Ledger

P Lee 2010 $ 2010 $ May 31 P Lau – Error correction 500 May 18 Bank 500

P Lau

2010 $ May 31 P Lee – Error correction 500

P Lee’s account was debited in order to offset (抵銷) the incorrect credit entry in his account, while P Lau’s account was credited in

order to make the correct entry in his account.

Class work 1

1. A sale of goods for $6,780 to H Lin had been entered in H Lui’s account on 15 May 2010. Show the journal entries and ledger to correct it if the error was found on 31 May 2010. Narrations are not required.

Journal

Date Details Dr Cr

2010 $ $

May 31 H Lin 6,780

H Lui 6,780 Accounts Receivable Ledger

H Lui 2010 $ 2010 $

May 15 Sales 6,780 May 31 H Lin – Error correction 6,780

H Lin 2010 $

May 31 H Lui – Error correction 6,780 2. A medical claim by a staff member for $400 had been recorded in the motor expenses column.

Journal

Details Dr Cr

$ $

Medical expenses 400

Motor expenses 400

Name : _________________ Serial No: _____

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6.3 Error of principle (原則性錯誤) An error of principle is where an entry has been made in a wrong type of account (錯誤記錄在另一類別的帳戶內). For example,

if we bought a lorry for $55,000 by cheque on 14 May 2010 but the value of the lorry was wrongly debited as an expense account instead of an asset account. The error in the above example would not affect the agreement of a trial balance (不影響試算表的平衡), as both the debit and

credit entries were of the same amount (因為借方和貸方記帳的金額相同). To correct errors, we first need to record the

correcting entries in the journal and then post the entries to the ledger accounts. If the error was found on 31 May 2010, the error should be corrected as follows:


Journal

Date Details Dr Cr

2010 $ $ May 31 Lorries 55,000

Motor expense 55,000 Correction of error: Purchases of a lorry wrongly posted to motor expense account

Step 2 Post the correcting entries to the ledger accounts (第二步把更正分錄過帳到分類帳帳戶內)

General Ledger

Motor expenses

2010 $ 2010 $ May 14 Bank 55,000 May 31 Lorries – Error correction 55,000

Lorries

2010 $ May 31 Motor expenses – Error correction 55,000

The motor expenses account was credited in order to offset the incorrect debit entry in his account, while the lorries account was

debited in order to make the correct entry in this account.

Class work 2

1. The purchase of a van for $38,000 in cash had been entered in the motor expenses account on 10 March 2010. Show the

journal entries and ledger to correct it if the error was found on 31 March 2010. Narrations are not required.

Journal

Date Details Dr Cr

2010 $ $

Mar 31 Vans 38,000

Motor expenses 38,000

General Ledger

Motor expenses

2010 $ 2010 $

Mar 10 Cash 38,000 Mar 31 Vans – Error correction 38,000

Vans

2010 $

May 31 Motor expenses – Error correction 38,000

2. A cheque of $1,890 for advertisement payment had been entered in the cash column of the cash book on 3 December 2010.

Show the journal entries to correct it if the error was found on 31 December 2010. Narrations are not required.

Journal

Date Details Dr Cr

2010 $ $

Dec 31 Cash 1,890

Bank 1,890

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6.4 Error of omission (遺漏錯誤) An error of omission is where no entry has been made for a transaction (漏記交易項目). For example, if we bought goods on

credit from T Hui for $2,500 on 12 May 2010 but no entries were made in our books to record this transaction. The error in the above example would not affect the agreement of a trial balance (不影響試算表的平衡), as no entries were

made in the ledger accounts (因為借方和貸方皆沒有記帳). To correct errors, we remake the omitted entries by recording the

correcting entries in the journal and then post the entries to the ledger accounts. If the error was found on 31 May 2010, the error should be corrected as follows:


Journal

Date Details Dr Cr

2010 $ $ May 31 Purchases 2,500

T Hui 2,500 Correction of error: Credit purchases from T Hui not recorded.


General Ledger

Purchases

2010 $ May 31 T Hui – Error correction 2,500

Accounts Payable Ledger

T Hui

2010 $ May 31 Purchases – Error correction 2,500

Class work 3

1. The purchase of a machine on credit from L Po for $43,900 had been completely omitted from the books on 18 March 2010.

Show the journal entries and ledger to correct it if the error was found on 31 March 2010. Narrations are not required.

Journal

Date Details Dr Cr

2010 $ $

Mar 31 Machinery 43,900

L Po 43,900

General Ledger

Machinery

2010 $

Mar 31 L Po – Error correction 43,900


L Po

2010 $

Mar 31 Machinery – Error correction 43,900 2. Accrued rental expenses of $5,210 were omitted from the books on 8 December 2010. Show the journal entries to correct it if

the error was found on 31 December 2010. Narrations are not required.

Journal

Date Details Dr Cr

2010 $ $

Dec 31 Rental expenses 5,210

Accrued rental expenses 5,210

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6.5 Error of original entry (原始分錄錯誤) An error of original entry is where an incorrect amount has been entered in a book of original entry (在原始分錄簿錯記金額)

and therefore the posting to ledger accounts is made with that incorrect amount (因此過帳到分類帳帳戶的金額也不正確). For

example, if we sold goods on credit to T Lo for $1,500 on 13 May 2010 but the debtor ’s account and the sales account were wrongly debited and credited with $1,300 instead of $1,500. The error in the above example would not affect the agreement of a trial balance, as both the debit and credit entries were of the same amount. To correct errors, T Lo’s account and the sales account were debited and credited, respectively, in order to add back the understated amount ($200) to these accounts. If the error was found on 31 May 2010, the error should be corrected as follows:

Step 1 Record the correcting entries in the journal (第一步在日記簿作更正分錄) Journal

Date Details Dr Cr

2010 $ $ May 31 T Lo 200

Sales 200 Correction of error: Credit sales of $1,500 wrongly posted as $1,300

Step 2 Post the correcting entries to the ledger accounts (第二步把更正分錄過帳到分類帳帳戶內) Accounts Receivable Ledger

T Lo 2010 $ May 13 Sales 1,300 May 31 Sales – Error correction 200

General Ledger Sales

2010 $ May 13 T Lo 1,300 May 31 T Lo – Error correction 200

Class work 4

1. A sale of goods for $2,210 to C Fung had been entered in the sales journal as $2,120 on 18 March 2010. Show the journal entries and ledger to correct it if the error was found on 31 March 2010. Narrations are not required.

Journal

Date Details Dr Cr

2010 $ $

Mar 31 C Fung ($2,210 $2,120) 90

Sales 90

Accounts Receivable Ledger

C Fung

2010 $

Mar 18 Sales 2,120

Mar 31 Sales – Error correction 90

General Ledger Sales

2010 $

May 18 C Fung 2,120

May 31 C Fung – Error correction 90 2. Purchases of $8,900 on credit from K Li had been entered in the purchases journal as $9,900 on 8 December 2010. Show the

journal entries to correct it if the error was found on 31 December 2010. Narrations are not required.

Journal

Date Details Dr Cr

2010 $ $

Dec 31 K Li ($9,900 $8,900) 1,000

Purchases 1,000

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6.6 Complete reversal of entries (顛倒入帳) Complete reversal of entries is where a double entry has been made on the wrong sides of ledger accounts (顛倒入帳是指顛倒

了分類帳帳戶的借方和貸方). For example, if we paid $2,000 cash to a trade creditor, D Cheung, on 28 May 2010. The cash

account was wrongly debited and the creditor’s account was wrongly credited. This error would not affect the agreement of a trial

balance, as both the debit and credit entries were of the same amount. If the error was found on 31 May 2010, the error should be

corrected as follows:


Journal Date Details Dr Cr

2010 $ $ May 31 D Cheung 4,000

Cash 4,000

Correction of error: Cash payment to D Cheung wrongly debited to cash account and credited to D Cheung’s account.

Step 2 Post the correcting entries to the ledger accounts (第二步把更正分錄過帳到分類帳帳戶內) Accounts Payable Ledger

D Cheung 2010 $ 2010 $ May 31 Cash – Error correction 4,000 May 28 Cash 2,000

General Ledger Cash

2010 $ 2010 $ May 28 D Cheung 2,000 May 31 D Cheung – Error correction 4,000

Class work 5

1. A cash payment of $8,000 to H Kwong had been entered on the debit side of the cash book and the credit side of H Kwong’s account on 28 May 2010. Show the journal entries and ledger to correct it if the error was found on 31 May 2010.

Journal

Date Details Dr Cr

2010 $ $

May 31 H Kwong 16,000

Cash 16,000


H Kwong

2010 $ 2010 $

May 31 Cash – Error correction 16,000 May 28 Cash 8,000

General Ledger Cash

2010 $ 2010 $

May 28 H Kwong 8,000 May 31 H Kwong – Error correction 16,000 2. Sales of $1,250 had been entered on the wrong side of the sales and debtor ’s account on 8 December 2010. Show the journal

entries to correct it if the error was found on 31 December 2010. Narrations are not required.

Journal

Date Details Dr Cr

2010 $ $

Dec 31 Debtor ($1,250 x 2) 2,500

Sales 2,500

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6.7 Compensating errors (抵銷性錯誤) Compensating errors are where two or more errors cancel out each other (抵銷性錯誤是指當兩個或以上的錯誤互相抵銷) so

that trial balance agreement is not affected (使試算平衡不會受到影響). For example, if the monthly total in the purchases

journal was overcast as $80,000 instead of $79,000, while the monthly total in the sales journal was overcast as $100,000 instead of $99,000 at the end of May 2010. Therefore, the purchases account was debited with an additional $1,000 and the sales account was also credited with an additional $1,000. These two errors would offset each other and the trial balance would still agree. If the errors were found on 15 June 2010, the error should be corrected as follows:


Date Details Dr Cr

2010 $ $ Jun 15 Sales 1,000

Purchases 1,000 Correction of error: Both purchases and sales overcast by $1,000

Step 2 Post the correcting entries to the ledger accounts (第二步把更正分錄過帳到分類帳帳戶內) General Ledger

Purchases 2010 $ 2010 $ May 31 Total for the month 80,000 Jun 15 Sales – Error correction 1,000

Sales 2010 $ 2010 $ Jun 15 Purchases – Error correction 1,000 May 31 Total for the month 100,000

Class work 6

1. If the monthly total of the returns inwards was $8,000 and the monthly total of the returns outwards was $120,000 on 31 May 2010 but both accounts had been overcast by $2,000. Show the journal entries and ledger to correct it if the error was found on 31 May 2010.

Journal

Date Details Dr Cr

2010 $ $

May 31 Returns outwards 2,000

Returns inwards 2,000

General Ledger Returns outwards

2010 $ 2010 $

May 31 Returns inwards – Error correction 2,000 May 31 Total for the month 120,000

Returns inwards

2010 $ 2010 $

May 31 Total for the month 8,000 May 31 Returns outwards – Error correction 2,000

2. Both the rent revenue and motor expense had been undercast by $200 on 8 December 2010. Show the journal entries to

correct it if the error was found on 31 December 2010. Narrations are not required.

Journal

Date Details Dr Cr

2010 $ $

Dec 31 Motor expense 200

Rent revenue 200

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Errors in nominal accounts after closing entries (名義賬戶關閉後的錯誤) If errors affecting nominal accounts (such as revenue and expense accounts) are found after closing entries have been made at the end of an accounting period (如果一些影響名義帳戶的錯誤在會計期結束後被發現), they should not be corrected in the

nominal accounts (他們不應該在名義帳戶內糾正) because these accounts have been closed off (因為這些名義帳戶已被封閉).

Instead, these errors should be corrected directly in the profit and loss account (相反，這些錯誤應該直接在損益表糾正內).

For example, if we bought a lorry for $55,000 by cheque on 14 May 2010 but the value of the lorry was wrongly debited as an expense account instead of an asset account. If the error was found at the end of accounting year, the error should be corrected as follows:


Date Details Dr Cr 2010 $ $ Dec 31 Lorries 55,000

Profit and loss – Motor expenses 55,000


General Ledger Lorries

2010 $ Dec 31 Profit and loss – Motor expenses 55,000

Profit and loss

2010 $ Dec 31 Lorries – Motor expenses 55,000

6.8 Errors in year-end adjustments (期末調整的錯誤) Adjustments are required for the following items at the end of an accounting period:

Valuation of inventory (Closing inventory) (存貨計價的錯誤)

Depreciation of non-current assets (折舊計算的錯誤)

Allowance for doubtful accounts (呆帳準備的錯誤)

Accruals and prepayments (處理應計和預付項目的錯誤)

1 Errors in the valuation of inventories (存貨計價的錯誤) If the closing inventory was valued at $20,000 at the end of an accounting period, we made the following entries:

Inventory $

Profit and loss 20,000

Profit and loss $ Inventory 20,000

However, it was later found that the closing inventory had been overvalued by $2,000. The correcting entries would be:

Journal Details Dr Cr

$ $ Profit and loss – Closing inventory 2,000 Inventory 2,000 Correction of error: Closing inventory overvalued by $2,000

Class work 7

The closing inventory had been undercast by $800. Show the journal entries to correct it. Narrations are not required.

Journal

Details Dr Cr

$ $

Inventory 800

Profit and loss – Closing inventory 800

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2 Errors in the charging of depreciation (折舊計算的錯誤) If the depreciation of $4,000 was charged on machinery, we made the following entries:

Depreciation: Machinery $ $

Accumulated depreciation: Machinery 4,000

Accumulated depreciation: Machinery $ $

Depreciation: Machinery 4,000 However, it was later found that the depreciation had been overcharged by $400. The correcting entries for the error would be:


$ $ Accumulated depreciation: Machinery 400

Depreciation: Machinery* (Profit and loss Depreciation) 400

Correction of error: Depreciation on machinery overcharged.

Note: If the depreciation charged account had been closed off, the entry would have been made in the profit and loss account.

Class work 8

Depreciation on office furniture had been overcharged by $2,000. Show the journal entries to correct it if the depreciation charged account for office furniture is closed. Narrations are not required.


$ $

Accumulated depreciation: Office furniture 2,000

Profit and loss Depreciation 2,000

3 Errors in the allowance for doubtful accounts (呆帳準備的錯誤) If the allowance for doubtful accounts was increased by $2,300, we made the following entries:

Profit and loss $ $

Allowance for doubtful accounts 2,300

Allowance for doubtful accounts $ $

Profit and loss – Increase in allowance for doubtful accounts $2,300 2,300

However, it was later found that the allowance for doubtful accounts should have been increased by $3,200. The correcting entries for the error would be:


$ $

Profit and loss – Increase in allowance for doubtful accounts ($3,200 $2,300) 900

Allowance for doubtful accounts 900 Correction of error: Allowance for doubtful accounts undercharged.

Class work 9

The allowance for doubtful accounts should have been increased by $4,200 instead of $2,400. Show the journal entries to correct it. Narrations are not required.

Journal

Details Dr Cr

$ $

Profit and loss – Increase in allowance for doubtful accounts ($4,200 $2,400) 1,800

Allowance for doubtful accounts 1,800

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4 Errors in the treatment of accruals and prepayments (處理應計和預付項目的錯誤) If the rent payment during the whole period amounted to $80,000 by cheque and rent expense account was adjusted for an accrual of $14,000 at the end of an accounting period, we made the following entries:

Rent Expense $ $

Bank 80,000 Profit and loss 94,000 Accrued c/f 14,000

94,000 94,000

Accrued b/f 14,000

However, it was later found that the accrual should have been a prepayment of rent. The correcting entries for the error would be:

Rent Expense $ $

Profit and loss 28,000 Accrued b/f 14,000 Prepaid c/f 14,000

28,000 28,000

Prepaid b/f 14,000

Alternative method Rent Expense

$ $ Bank 80,000 Profit and loss 94,000 Accrued rent expense 14,000

94,000 94,000

Accrued rent expense $ Rent expense 14,000

However, it was later found that the accrual should have been a prepayment of rent. The correcting entries for the error would be:


$ $ Accrued rent expense 14,000 Prepaid rent expense 14,000 Rent expense* (Profit and loss – Rent expenses) 28,000 Correction of error: Prepayment of rent wrongly treated as an accrual.

Note: If the rent expense account had been closed off, the credit entry would have been made in the profit and loss account.

Accrued rent expense

$ $ Rent expense 14,000 Rent expense 14,000

Prepaid rent expense

$ Rent expense 14,000

Rent Expense

$ $ Profit and loss 28,000 Accrued rent expense 14,000 Prepaid rent expense 14,000

28,000 28,000

Class work 10

An accrued expense of $500 had been recorded as an accrued revenue and the expenses and revenues accounts are closed. Journal

Details Dr Cr

$ $

Profit and loss revenue/expense 1,000

Accrued revenue 500

Accrued expense 500

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Class work 11

1. For each of the independent situations described below, prepare journal entries to show the necessary adjustment. Narrations

are not required.

(i) Rental income of $4,355 represented the amount received for sub-letting part of the office premises for 13 months from 1

January 2011 to 31 January 2012.

(ii) An insurance premium of $2,190 was prepaid for the three months ended 31 March 2012.

(iii) Accrued rental expenses of $5,210 and prepaid insurance expenses of $2,100 were omitted from the books.

(iv) An accrued expense of $700 had been recorded as a prepaid expense and the expenses accounts are closed.

(v) The accrued expenses of $180 should have been prepaid expenses and the expenses accounts are closed.

(vi) The firm had $11,250 in wages and salaries outstanding as at 31 March 2010 but this had not been recorded and the wages

and salaries account is closed.

(vii) As at 31 December 2010, prepaid rent and accrued telephone expenses amounted to $500 and $300, respectively. No entry

had been made in the books and the expenses accounts are closed.

(viii) As at 30 April 2010, prepaid repair costs and accrued rent revenue amounted to $210 and $1,700, respectively. No entry had

been made in the books.

(ix) As at 30 June 2012, prepaid wages and accrued miscellaneous expenses were $1,000 and $1,300, respectively. No entry had

been made in the books and the expenses accounts are closed..

Journal

Details Dr Cr

$ $

(i) Rental income ($4,355 x 1/13) 335

Unearned revenue 335

(ii) Prepaid expenses 2,190

Insurance 2,190

(iii) Rental expenses 5,210


Prepaid insurance expenses 2,100

Insurance expenses 2,100

(iv) Profit and loss – Expenses ($700 x 2) 1,400

Prepaid expense 700

Accrued expense 700

(v) Accrued expenses 180

Prepaid expenses 180

Profit and loss ($180 x 2) 360

(vi) Profit and loss – Wages and salaries 11,250

Accrued expenses 11,250

(vii) Prepaid expenses 500

Profit and loss – Rent 500

Profit and loss – Telephone expenses 300

Accrued expenses 300

(viii) Prepaid expenses 210

Repair costs 210

Accrued revenue 1,700

Rent revenue 1,700

(ix) Prepaid expenses 1,000

Profit and loss – Wages and salaries 1,000

Profit and loss – Miscellaneous expenses 1,300


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2. For each of the independent situations described below, prepare journal entries to show the necessary adjustment. Narrations are not required.

(i) After inventory was taken at the year-end date, the closing inventory was determined to be $314,800. The bookkeeper recorded it in the books as follows:

Dr Profit and loss account $318,400 Cr Inventory account $318,400

(ii) Accrued rental expenses of $5,210 and prepaid insurance expenses of $2,100 were omitted from the books. (iii) Depreciation for office equipment was overcharged by $3,800. (iv) The bank made a payment of $6,443 under a standing order for a subscription to a trade association. The item had been

debited to the wages account. (v) A bad debt recovered in the amount of $880 was for a debt written off earlier in the same financial year. No record was made

of the recovery. (vi) A cheque for $2,220 was drawn by the business at the year-end date but had not yet been presented for payment.

Journal

Details Dr Cr

$ $

(i) Inventory ($318,400 + $314,800) 633,200

Profit and loss ─ Closing inventory 633,200

(ii) Rental expenses 5,210


Prepaid insurance expenses 2,100

Insurance expenses 2,100

(iii) Accumulated depreciation: Office equipment 3,800

Depreciation: Office equipment 3,800

(iv) Subscriptions 6,443

Wages 6,443

(v) Account receivable 880

Bad debts 880

(vi) No journal entry is required

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3. F Mok, a wholesaler, does not know much about accounting. He has drawn up the following trial balance for his business.

F Mok Trial Balance as at 31 December 2009

Dr Cr $ $ Inventory as at 1 January 2009 3,000 Inventory as at 31 December 2009 6,400 Purchases 10,000 Sales 22,000 Office equipment (net) 10,000 Furniture and fittings (net) 20,000 Bank 6,000 Accounts receivable 3,600 Accounts payable 2,400 Office expenses 4,000 Sundry expenses 2,500 Capital 34,700

62,300 62,300

Required: (a) After the preparation of the trial balance, the following errors were found: (i) Repairs to office equipment for $500 had been entered in the office equipment account. (ii) Both the sales and purchases accounts had been overcast by $200. (iii) A sundry expense of $100 should have been accrued. Show the journal entries to correct the above errors. (b) Prepare a corrected trial balance as at 31 December 2009. (a)

Journal

Details Dr Cr

$ $

(i) Office expenses 500

Office equipment 500

(ii) Sales 200

Purchases 200

(iii) Sundry expenses 100


(b) F Mok

Corrected Trial Balance as at 31 December 2009

Dr Cr

$ $

Inventory as at 1 January 2009 3,000

Purchases ($10,000 – $200) 9,800

Sales ($22,000 – $200) 21,800

Office equipment (net) ($10,000 – $500) 9,500

Furniture and fittings (net) 20,000

Bank 6,000

Accounts receivable 3,600

Accounts payable 2,400

Office expenses ($4,000 + $500) 4,500

Sundry expenses (2500 + 100) 2,600


Capital 34,700

62,300 62,300

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4. The following trial balance was extracted from Dolce Enterprise’s books as at 31 December 2011:

Dr Cr

$ $

Capital as at 1 January 2011 300,000 5% bank loan 150,000 Non-current assets 270,300 Purchases 733,500 Sales 1,149,750 Inventory as at 1 January 2011 91,800 Loan interest 7,500 Accounts receivable 181,900 Accounts payable 164,200 Bank 123,350 Bad debts 1,800 Water and electricity 7,000 Carriage outwards 2,255 Rental income 4,355 Returns outwards 7,950 Rent, rates and insurance 201,000 Salaries and wages 148,050 General expenses 7,800

1,776,255 1,776,255

Inventory as at 31 December 2011 was valued at $90,855.

After the preparation of the trial balance, the following errors were discovered: (i) A credit purchase of $1,500 had been completely omitted. (ii) A credit sale of goods to Miss Fong totalling $1,300 had been posted to her personal account in the accounts receivable ledger

and the sales account as $3,100. (iii) Bank charges of $150 were included in the bank statement for December 2011. No entry had been made in the books. (iv) Rental income represented the amount received for sub-letting part of the office premises for 13 months from 1 January 2011

to 31 January 2012. (v) An insurance premium of $2,190 was prepaid for the three months ended 31 March 2012. Required: (a) Show the journal entries to correct the above errors. (Narrations are not required.) (b) Prepare a corrected trial balance as at 31 December 2011. (c) Prepare an income statement for the year ended 31 December 2011.

Answer:

(a)

The Journal

Details Dr Cr

$ $

(i) Purchases 1,500


(ii) Sales ($3,100 – $1,300) 1,800

Miss Fong 1,800

(iii) Bank charges 150

Bank 150

(iv) Rental income 335

Unearned revenue ($4,355 1/13) 335

(v) Prepaid expenses 2,190

Insurance 2,190

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(b)

Dolce Enterprise Corrected Trial Balance as at 31 December 2011

Dr Cr

$ $

Capital as at 1 January 2011 300,000

5% bank loan 150,000

Non-current assets 270,300

Purchases ($733,500 + $1,500) 735,000

Sales ($1,149,750 – $1,800) 1,147,950

Inventory as at 1 January 2011 91,800

Loan interest 7,500

Accounts receivable ($181,900 – $1,800) 180,100

Accounts payable ($164,200 + $1,500) 165,700

Bank ($123,350 – $150) 123,200

Bad debts 1,800

Water and electricity 7,000

Carriage outwards 2,255

Rental income ($4,355 – $335) 4,020

Returns outwards 7,950

Rent, rates and insurance ($201,000 – $2,190) 198,810

Salaries and wages 148,050

General expenses 7,800

Bank charges 150

Prepaid expenses 2,190


1,775,955 1,775,955

(c) Dolce Enterprise

Income Statement for the year ended 31 December 2011

$ $ $

Opening inventory 91,800 Sales 1,147,950

Purchases 735,000

Less Returns outwards (7,950) 727,050

818,850

Less Closing inventory (90,855)

Cost of goods sold 727,995

Gross profit c/d 419,955

1,147,950 1,147,950

Loan interest 7,500 Gross profit b/d 419,955

Bad debts 1,800 Rental income 4,020

Water and electricity 7,000

Carriage outwards 2,255

Rent, rates and insurance 198,810

Salaries and wages 148,050

General expenses 7,800

Bank charges 150

Net profit 50,610

423,975 423,975

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5. The balance sheet of Watt Enterprise as at 31 March 2010 is set out below:

Balance Sheet as at 31 March 2010

$ $ $ $ Non-current assets Capital Plant and machinery 120,000 Balance as at 1 April 2009 135,000 Less Accumulated Add Net profit for the year 43,500

depreciation (30,000 ) 90,000 178,500

Motor vehicles 112,500 Less Drawings (11,190 )

Less Accumulated 167,310 depreciation (52,500 ) 60,000 Current liabilities

150,000 Accounts payable 5,010 Current assets Accrued expenses 180 5,190

Inventory 12,300 Accounts receivable 6,225 Bank 3,975 22,500

172,500 172,500

After investigation, the following information was revealed: (i) During the inventory taking on 31 March 2010, 375 units of goods were entered at a unit cost of $1.8. Those goods should

have been valued at $10.8 per unit. (ii) An allowance for doubtful accounts at 8% of accounts receivable was to be created. In addition, an allowance for discounts

allowed of 2% was to be made. (iii) It is the firm’s policy to depreciate non-current assets based on the reducing-balance method. Unfortunately, the accounts

clerk wrongly computed the depreciation for the year (plant and machinery for $12,000 and motor vehicles for $22,500) based on the straight-line method even though the same rates had been applied. There was no purchase or disposal of non-current assets during the year.

(iv) The accrued expenses of $180 should have been prepaid expenses. (v) The firm had $11,250 in wages and salaries outstanding as at 31 March 2010 but this had not been recorded. Required: (a) Prepare the journal entries to correct the above errors. (Narrations are not required.) (b) Calculate the net profit after adjustments have been made. (c) Prepare a statement to ascertain the amount of net current assets as at 31 March 2010. (Calculations to the nearest dollar)

Answer:

(a)

The Journal

Details Dr Cr

$ $

(i) Inventory [375 × ($10.8 – $1.8)] 3,375


(ii) Profit and loss 613

Allowance for doubtful accounts ($6,225 × 8%) 498

Allowance for discounts allowed [($6,225 – $498) × 2%] 115

(iii) Accumulated depreciation: Plant and machinery 1,800

Profit and loss ─ Depreciation (W1) 1,800

Accumulated depreciation: Motor vehicles 6,000

Profit and loss ─ Depreciation (W2) 6,000

(iv) Accrued expenses 180


Profit and loss ─ expenses 360

(v) Profit and loss ─ Wages and salaries 11,250


(W1) Plant and machinery:

Depreciation rate = 000,120$

000,12$ 100% = 10%

Under the reducing-balance method, the depreciation charge for the year

= [$120,000 – ($30,000 – $12,000)] 10% = $10,200

Depreciation overstated = $12,000 – $10,200 = $1,800

(W2) Motor vehicles:

Depreciation rate = 500,112$

500,22$ 100% = 20%


= [$112,500 – ($52,500 – $22,500)] 20% = $16,500


16

(b)

Watt Enterprise

Statement of Adjusted Net Profit for the year ended 31 March 2010

$ $

Net profit before adjustments 43,500

Add Closing inventory understated (i) 3,375

Depreciation on plant and machinery overstated (iii) 1,800

Depreciation on motor vehicles overstated (iii) 6,000

Prepaid expenses wrongly recorded as accrued expenses (iv) 360 11,535

55,035

Less Allowance for doubtful accounts omitted (ii) 498

Allowance for discounts allowed omitted (ii) 115

Accrued expenses omitted (v) 11,250 (11,863)

Adjusted net profit 43,172

(c)

Watt Enterprise

Statement of Adjusted Net Current Assets as at 31 March 2010

$ $

Current assets

Inventory ($12,300 + $3,375) 15,675

Accounts receivable 6,225

Less Allowance for doubtful accounts (498)

Allowance for discounts allowed (115) 5,612


Bank 3,975

25,442

Less Current liabilities


Accrued expenses 11,250 (16,260)

Adjusted net current assets 9,182

17

6. The petty cashier of Hush Enterprise found that the petty cash balance shown in the petty cash book as at 30 April 2011 was different from the amount kept in the cash box. The balances were as follows: Balance as per petty cash book $1,250 Petty cash balance in the cash box $3,080 The monthly total of the expenses paid by petty cash had already been posted to the general ledger. After investigation, the petty cashier found the following mistakes: (i) A payment for cleaning expenses of $450 had been recorded twice in the petty cash book. (ii) Travelling expenses of $55 had been recorded in the petty cash book as $25. (iii) A medical claim by a staff member for $400 had been recorded in the motor expenses column. (iv) A magazine subscription of $1,000 had been paid by cheque. The petty cashier wrongly recorded it in the petty cash book. (v) A petty cash application to purchase stationery costing $710 was not paid by the petty cashier until 1 May 2011. However,

it had been recorded in the petty cash book. (vi) During the month, the petty cashier reimbursed a staff member $330 for postage, which was actually $30. The amount

recorded in the petty cash book was $30. As at 30 April 2011, the staff member had not returned the overpayment.

Required: (a) Prepare the journal entries to correct the above errors. (Narrations are not required.) (b) Prepare a statement to show the correct petty cash book balance. (c) Prepare a statement to show the correct petty cash on hand balance, starting with the corrected petty cash book balance

computed in part (b).

Answer: (a)

The Journal

Details Dr Cr

$ $

(i) Petty cash 450

Cleaning expenses 450

(ii) Travelling expenses ($55 – $25) 30

Petty cash 30

(iii) Medical expenses 400

Motor expenses 400

(iv) Petty cash 1,000

Bank 1,000

(v) Petty cash 710

Stationery expenses 710

(b)

Statement Showing the Correct Petty Cash Book Balance as at 30 April 2011

$ $

Balance as per petty cash book before correction 1,250

Add Cleaning expenses recorded twice (i) 450

Magazine subscription wrongly recorded (iv) 1,000

Stationery expense not yet incurred (v) 710 2,160

3,410

Less Travelling expenses understated (ii) (30)

Correct petty cash book balance 3,380

(c)

Statement Showing the Correct Petty Cash On Hand Balance as at 30 April 2011

$

Correct petty cash book balance 3,380

Less Over-payment of postage (vi) ($330 – $30) (300)

Correct petty cash on hand balance 3,080

18

3. The following trial balance was extracted from Dolce Enterprise’s books as at 31 December 2011:

Dr Cr

$ $

Capital as at 1 January 2011 300,000 5% bank loan 150,000 Non-current assets 270,300 Purchases 733,500 Sales 1,149,750

19

Inventory as at 1 January 2011 91,800 Loan interest 7,500 Accounts receivable 181,900 Accounts payable 164,200 Bank 123,350 Bad debts 1,800 Water and electricity 7,000 Carriage outwards 2,255 Rental income 4,355 Returns outwards 7,950 Rent, rates and insurance 201,000 Salaries and wages 148,050 General expenses 7,800

1,776,255 1,776,255

Inventory as at 31 December 2011 was valued at $90,855.

After the preparation of the trial balance, the following errors were discovered:

(i) A credit purchase of $1,500 had been completely omitted.

(ii) A credit sale of goods to Miss Fong totalling $1,300 had been posted to her personal account in the accounts receivable ledger

and the sales account as $3,100.

(iii) Bank charges of $150 were included in the bank statement for December 2011. No entry had been made in the books.

(iv) Rental income of $4,355 represented the amount received for sub-letting part of the office premises for 13 months from 1

January 2011 to 31 January 2012.

(v) An insurance premium of $2,190 was prepaid for the three months ended 31 March 2012.

Required:

(d) Show the journal entries to correct the above errors. (Narrations are not required.)

(e) Prepare a corrected trial balance as at 31 December 2011.

(f) Prepare an income statement for the year ended 31 December 2011.

Journal

Details Dr Cr

$ $

(i) Purchases 1,500


(ii) Sales ($3,100 $1,300) 1,800

Miss Fong 1,800

(iii) Bank charges 150

Bank 150

(iv) Rental income ($4,355 x 1/13) 335


(v) Prepaid expenses 2,190

Insurance 2,190

3. For each of the independent situations described below, prepare the journal entries to show the necessary adjustment.

Narrations are not required.

(i) A telephone bill for $632 had been paid through the bank using direct debit. The business made the following entries after a

bank statement was received at the end of the month.

Dr Telephone expenses $623

Cr Bank $623

Discounts allowed are only for cash discount not the

trade discount. So no need to enter the discount allowed

in this case. On the other hand, the amount for sales and

20

(ii) Credit sales of $250 to Kammy Luk, a customer, had been recorded in the purchases journal and then posted to the accounts

payable ledger.

(iii) The business decided to increase the allowance for doubtful accounts from $1,366 to $2,134.

(iv) Depreciation at a rate of 5% on cost should be made on office equipment. The cost of the office equipment was $125,000.

The following entries were made to record this:

Dr Accumulated depreciation: Office equipment $6,250

Cr Depreciation: Office equipment $6,250

(v) A gross credit sale of $50,000 with a 5% trade discount was made and the following entries were made:

Dr Accounts receivable $47,500

Dr Discounts allowed $2,500

Cr Sales $50,000

(vi) During the year, furniture which originally cost $74,220 and for which no depreciation had been was sold for $33,990 and the

sum was paid by cheque. The bookkeeper debited the bank account and credited the sales account.

Journal

Details Dr Cr

$ $

(i) Telephone expenses ($632 $623) 9

Bank 9

(ii) Accounts payable Kammy Luk 250

Purchases 250

Accounts receivable Kammy Luk 250

Sales 250

(iii) Profit and loss – Increase in allowance for doubtful accounts ($2,134 $1,366) 768

Allowance for doubtful accounts 768

(iv) Depreciation: Office equipment ($6,250 x 2) 12,500

Accumulated depreciation: Office equipment 12,500

(v) Sales ($50,000 – $47,500) 2,500

Discounts allowed 2,500

(vi) Sales 33,990

Disposal: Furniture 33,990


Furniture 74,220

Profit and loss – Loss on disposal 40,230


Look back to Disposal of non-current assets

21

The balance sheet of Watt Enterprise as at 31 March 2010 is set out below:

Balance Sheet as at 31 March 2010

$ $ $ $ Non-current assets Capital Plant and machinery 120,000 Balance as at 1 April 2009 135,000 Less Accumulated Add Net profit for the year 43,500

depreciation (30,000 ) 90,000 178,500

Motor vehicles 112,500 Less Drawings (11,190)

)Less Accumulated 167,310 depreciation (52,500 ) 60,000 Current liabilities

150,000 Accounts payable 5,010 Current assets Accrued expenses 180 5,190

Inventory 12,300 Accounts receivable 6,225 Bank 3,975 22,500

172,500 172,500

After investigation, the following information was revealed:

(vi) During the inventory taking on 31 March 2010, 375 units of goods were entered at a unit cost of $1.8. Those goods should

have been valued at $10.8 per unit.

(vii) An allowance for doubtful accounts at 8% of accounts receivable was to be created. In addition, an allowance for discounts

allowed of 2% was to be made.

(viii) It is the firm’s policy to depreciate non-current assets based on the reducing-balance method. Unfortunately, the accounts

clerk wrongly computed the depreciation for the year (plant and machinery for $12,000 and motor vehicles for $22,500) based

on the straight-line method even though the same rates had been applied. There was no purchase or disposal of non-current

assets during the year.

(ix) The accrued expenses of $180 should have been prepaid expenses.

(x) The firm had $11,250 in wages and salaries outstanding as at 31 March 2010 but this had not been recorded.

Required:

(a) Prepare the journal entries to correct the above errors. (Narrations are not required.)

22

(b) Calculate the net profit after adjustments have been made.

(c) Prepare a statement to ascertain the amount of net current assets as at 31 March 2010.

(Calculations to the nearest dollar)

Journal

Details Dr Cr

$ $

(i) Inventory [375 × ($10.8 – $1.8)] 3,375


(ii) Profit and loss 613

Allowance for doubtful accounts ($6,225 × 8%) 498

Allowance for discounts allowed [($6,225 – $498) × 2%] 115

(iii) Accumulated depreciation: Plant and machinery (W1) 1,800

Profit and loss ─ Depreciation 1,800

Accumulated depreciation: Motor vehicles (W2) 6,000

Profit and loss ─ Depreciation 6,000

(iv) Accrued expense 180

Prepaid expense 180

Profit and loss 360

(v) Profit and loss 11,250


(W1) Plant and machinery: Depreciation rate = 000,120$

000,12$ 100% = 10%


= [$120,000 – ($30,000 – $12,000)] 10% = $10,200


(W2) Motor vehicles: Depreciation rate = 500,112$

500,22$ 100% = 20%


= [$112,500 – ($52,500 – $22,500)] 20% = $16,500


chapter 6 correction of errors [i]: errors not …proxy.flss.edu.hk/~flssmcwong/s5 notes/chapter...

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