chapter 7 correction of errors [ii]: errors affecting …proxy.flss.edu.hk/~flssmcwong/s5...

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Chapter 7 Correction of Errors [II]: Errors Affecting Trial Balance Agreement

7.2 Suspense account (暫記帳戶) If the trial balance does not agree, we should make it agree by opening a suspense account (開設暫記帳戶). A suspense account

(暫記帳戶) is a temporary account (臨時帳戶) used to record the difference (用來記錄差額) between the debit and credit totals

(借方與貸方的總和) of the trial balance. Usually, we put the shortage amount in the smaller balance (把短缺的金額放在較小平

衡的一方).

Example 1 Trial Balance as at 30 June 2010

Dr Cr $ $ Machinery 60,000 Inventory 20,000 Accounts receivable 5,550 Bank 14,400 Capital 70,000 Accounts payable 30,000

99,950 100,000 To enable the preparation of financial statements, a suspense account was opened to make the trial balance agree. Hence the amount of shortage was debited to the suspense account as follows (因此，短缺的金額會在暫記帳戶中借方記入):

Suspense 2010 $ 2010 $ Jun 30 Difference as per trial balance 50 Jun 30 Balance c/f 50 Jul 1 Balance b/f 50

As a result, the trial balance was made to agree as follows:

Trial Balance as at 30 June 2010 Dr Cr $ $ Machinery 60,000 Inventory 20,000 Accounts receivable 5,550 Bank 14,400 Capital 70,000 Accounts payable 30,000 Suspense 50

100,000 100,000

In addition, the balance in the suspense account should be shown separately in the balance sheet. If it is a debit balance, it should be shown as a positive figure

Balance sheet as at 31 December 2008

$ $ Non-current assets Machinery 60,000 Current assets Inventory 20,000 Accounts receivable 5,550 Bank 14,400

39,950 Less Current liabilities

Accounts payable (30,000)

Net current assets 9,950

69,950 Suspense 50

70,000

Capital 70,000

Name : _________________ Serial No: _____

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If it is a credit balance, it should be shown as a negative figure

Balance sheet as at 31 December 2008

$ $ Non-current assets Machinery 60,000 Current assets Inventory 20,000 Accounts receivable 5,550 Bank 14,400

39,950 Less Current liabilities



69,950 Suspense (50)

69,900

Capital 69,900

Note that the suspense account (暫記帳戶) is only a temporary account (只是臨時帳戶). It will be closed (會被結清) once all the

errors are found and corrected (當找出和更正所有錯誤後). In examinations (在公開考試中), students should not make the trial

balance or the balance sheet agree (考生不應為了平衡試算表或資產負債表) simply by inserting a suspense account balance (而

加入暫記帳戶的餘額). The practice will earn no marks (這種做法將不會得分).

Class work 1

Trial Balance as at 31 March 2010 Dr Cr $ $ Machinery 80,000 Inventory 25,000 Accounts receivable 12,000 Bank 9,600 Capital 100,000 Accounts payable 26,000

126,600 126,000

(a) Show the necessary entries in the suspense account.

Cr Suspense $600

(b) Prepare a balance sheet as at 31 March 2010.

Balance sheet as at 31 March 2008

$ $

Non-current assets

Machinery 80,000

Current assets

Inventory 25,000

Accounts receivable 12,000

Bank 9,600

46,600

Less Current liabilities



100,600

Suspense (600)

100,000

Capital 100,000

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7.3 Errors affecting trial balance agreement (影響試算表平衡的錯誤) 1 Casting error in a book of original entry (原始分錄簿加總出錯) Suppose the sales journal was cast as $50,400 instead of $54,400, and the following entries were made in the books: Dr Debtors’ accounts $54,400 Cr Sales account $50,400

The above error would give rise (引起) to a shortage (短缺) of $4,000 in the credit total (貸記總額) of the trial balance. If this

error was not found and corrected (沒有被發現和糾正) before the preparation of financial statements (在編制財務報表前), the

shortage (短缺) would be recorded in the suspense account (暫記帳戶) as follows:

Cr Suspense account $4,000

When the error was found (當發現錯誤), it should be corrected as follows (應更正如下):

Dr Suspense account $4,000 Cr Sales account $4,000 (If the sales account had been closed off, the entry should be made in the profit and loss account.)

2 Single entry (單式記帳) Suppose a cash payment of $1,680 was made to a creditor, K Lee, and the following entry was made in the books: Cr Cash account $1,680

The above error would give rise to a shortage of $1,680 in the debit total (借記總額) of the trial balance. If this error was not

found and corrected before the preparation of financial statements, the shortage would be recorded in the suspense account as follows: Dr Suspense account $1,680

When the error was found, it should be corrected as follows: Dr K Lee’s account $1,680 Cr Suspense account $1,680

3 Double entry of unequal amounts (不同金額的複式記帳) Suppose goods were purchased for $12,000 on credit from K Yu, and the following entries were made in the books: Dr Purchases account $12,000 Cr K Yu’s account $1,200

The above error would give rise to a shortage of $10,800 in the credit total of the trial balance. If this error was not found and corrected before the preparation of financial statements, the shortage would be recorded in the suspense account as follows: Cr Suspense account $10,800

When the error was found, it should be corrected as follows: Dr Suspense account $10,800 Cr K Yu’s account $10,800

4 Incorrect casting of an account (帳戶加總出錯) Suppose the debit side of the drawings account was cast as $10,000 instead of $11,000. As a result, the debit balance in the drawings account would be understated by $1,000.

If this error was not found and corrected before the preparation of financial statements, the shortage would be recorded in the suspense account as follows: Dr Suspense account $1,000

When the error was found, it should be corrected as follows: Dr Drawings account $1,000 Cr Suspense account $1,000

5 Incorrect listing of balance in the trial balance (試算表錯列餘額) Suppose the debit balance of $2,400 of the carriage outwards account was listed as a credit balance in the trial balance.

The above error would give rise to a shortage of $4,800 in the debit total of the trial balance. If this error was not found and corrected before the preparation of financial statements, the shortage would be recorded in the suspense account as follows: Dr Suspense account $4,800

When the error was found, it should be corrected as follows: Cr Suspense account $4,800

There is no need to make any correcting entry in the carriage outwards account because all the entries in it were correctly made. We only need to take out the error ($4,800) from the suspense account and place the balance of the carriage outwards account on the correct (i.e., debit) side of the trial balance.

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Class work 2

1. (a) Show how each of the following errors would affect the agreement of the trial balance: (i) The sale of a machine for $640 was credited to the sales account. (ii) A cheque of $370 paid to a creditor, P Liu, was debited to the account of another creditor, P Li. (iii) Purchases were overcast by $1,000. (Casting error in a book of original entry) (iv) A cheque of $450 paid for rates was correctly entered in the cash book, but had not been posted to any ledger

account. (Single entry) (v) No entry had been made for an accrued expense of $180. (vi) Equipment repairs, $720, were debited to the equipment account. (vii) Discounts allowed amounting to $1,700 were credited to the discounts received account. (Single entry) (viii) The closing inventory was overvalued by $2,000. (ix) Commission received of $750 was debited to the sales account. (Single entry) (x) Drawings of $305 were credited to the capital account. (Single entry) (xi) A cheque of $170 payable to C Chang was entered in the cash book but not in the personal account. (Single entry) (xii) A cheque of $248 received from a debtor, L Wu, was credited to the account of another debtor, L Woo.

(b) Show the journal entries to correct the above errors that affected the trial balance. Narrations are not required.

(a)

Item No effect Debit total exceeds credit total by the amount of Credit total exceeds debit total by the amount of

(i)

(ii)

(iii) $1,000

(iv) $450

(v)

(vi)

(vii) $3,400

(viii)

(ix) $1,500

(x) $610

(xi) $170

(xii)

(b) Journal

Details Dr Cr

$ $

(iii) Suspense 1,000

Purchases 1,000

(vi) Rates 450

Suspense 450

(vii) Discounts allowed 1,700

Discounts received 1,700

Suspense 3,400

(ix) Suspense 1,500

Commission 750

Sales 750

(x) Capital 305

Drawings 305

Suspense 610

(xi) Accounts payable C Chang 170

Suspense 170

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2. It is given the following journal entries.

The Journal

Details Dr Cr

$ $ (i) Drawings 15,000

Bank 10,000

Purchases 5,000

(ii) Rates 2,950

Suspense 2,950

(iii) Suspense ($38,838 – $38,388) 450

Purchases 450

(iv) Suspense 3,200

Discounts allowed 1,600


(v) Bank 1,500

Bad debts recovered ($3000 1/2) 1,500

The trial balance of a business as at 31 December 2009 showed a difference of $700 (credit). If a suspense account was then opened to record the difference, prepare the suspense account.

General Ledger

Suspense $ $

Purchases (iii) 450 Balance b/f 700 Discounts errors (iv) 3,200 Rates (ii) 2,950

3,650 3,650

3. The trial balance of a business as at 31 December 2009 showed a difference of $770 (credit). A suspense account was then

opened to record the difference. After preparing the draft financial statement for the year, the errors causing the difference in the trial balance were found: (i) A cheque receipt of $1,500 from a debtor, L Kwai, had been correctly recorded in the cash book but had not been posted

to L Kwai’s account. (ii) The purchases journal had been overcast by $200 and the purchases accounts are closed. (iii) The credit side of the discounts received had been overcast by $930 and the discounts received accounts are closed.

(a) Show the journal entries to correct the above errors. (b) Prepare the suspense account

(a)

Journal

Details Dr Cr $ $

(i) Suspense 1,500

L Kwai 1,500

Correct of error: Cheque receipt not posted to L Kwai’s account

(ii) Suspense 200

Profit and loss – Purchases 200

Correct of error: Purchases journal overcast

(iii) Profit and loss – Discounts received 930

Suspense 930

Correct of error: Discounts received overcast

(b) Suspense

$ $

L Kwai (i) 1,500 Balance b/f 770

Profit and loss – Purchases (ii) 200 Profit and loss – Discounts received (iii) 930

1,700 1,700

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4. The trial balance of Tom Tong business did not agree and showed a difference of $7,330 (debit) as at 31 December 2010. Mr.

Tong opened a suspense account to record the trial balance difference. The following errors were subsequently found: (i) A payment of $11,200 by cheque to settle the account of a trade creditor, Paul Ho, had been posted to Paul Hung’s

account as $11,020. (ii) Rates of $7,600 paid in October 2010 were entered in the cash book, but no entry had been made in the rates account. (iii) The total of the purchases day book had been entered in the purchases account as $38,838 instead of the correct figure of

$38,388.

(a) Show the journal entries to correct the above errors.

Journal

Details Dr Cr

$ $ (i) Paul Ho 11,200

Paul Hung 11,020

Suspense 180

(ii) Rates 7,600

Suspense 7,600

(iii) Suspense ($38,838 – $38,388) 450

Purchases 450

(b) Prepare the suspense account

Suspense $ $

Balance b/f 7,330 Paul Ho (i) 180

Purchases (iii) 450 Rates (ii) 7,600

7,780 7,780

5. Test 1

6. K Wong extracted the following trial balance from the books of his business. He was unable to get the totals to agree. So a suspense account was opened to record the difference.

K Wong Trial Balance as at 30 June 2009

Dr Cr $ $

Purchases and sales 62,400 87,050 Discounts allowed and received 305 410 Salaries and wages 3,168 General expenses 595 Fixtures 10,000 Inventory as at 1 July 2008 12,490 Accounts receivable and payable 8,120 5,045 Bank 6,790 Drawings 4,520 Capital 17,017 Suspense 1,134

109,522 109,522

The following errors were later found: (i) The sales journal had been overcast by $350 (ii) Discounts allowed had been undercast by $100. (iii) Fixtures, bought for $850, had been entered in the cash book but not in the fixtures account. (ignore depreciation) (iv) A credit purchase of $166 had been entered in the purchases journal, but had not been posted to the creditor ’s account. (v) A cheque payment of $490 to a creditor had been debited to the drawings account. You are require to: (a) Prepare the necessary journal entries to correct the above errors. (Narrations are not required.) (b) Draw up the suspense account. (c) Redraft the trial balance after all corrections have been made.

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Answer: (a)

Journal

Details Dr Cr

2009 $ $

(i) Jun 30 Sales 350

Suspense 350

(ii) Jun 30 Discounts allowed 100

Suspense 100

(iii) Jun 30 Fixtures 850

Suspense 850

(iv) Jun 30 Suspense 166

Accounts payable 166

(v) Jun 30 Accounts payable 490

Drawings 490

(b) Suspense

2009 $ 2009 $

Jun 30 Balance b/f 1,134 Jun 30 Sales overcast (i) 350

“ 30 Credit purchase omitted (iv) 166 “ 30 Discounts allowed undercast (ii) 100

“ 30 Fixtures omitted (iii) 850

1,300 1,300

(c) K Wong

Trial Balance as at 30 June 2009

Dr Cr

$ $

Sales ($87,050 – $350) 86,700

Purchases 62,400

Discounts allowed ($305 + $100) 405

Discounts received 410

Salaries and wages 3,168

General expenses 595

Fixtures ($10,000 + $850) 10,850

Inventory as at 1 July 2008 12,490


Accounts payable ($5045 + $166 – $490) 4,721

Bank 6,790

Drawings (4,520 – 490) 4,030

Capital 17,017

108,848 108,848

7. Test 2

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7.4 Adjustments of profits (利潤調整) Some errors would affect the profit while others would not. If an error affects the items in the income statement (如果是損益表項

目出錯), such as cost of goods sold, expenses or other revenues (例如銷貨成本、費用或其他收益), the profit would be affected

(毛利及純利便會受到影響). If an error affects only the items in the balance sheet (如果只是資產負債表項目出錯), the profit

would not be affected (期內的利潤便不會受到影響).

Usually, the credit journal entries of expenses, revenues and profit and loss account (開支，收入及損益賬的借方入賬) will raise

the net profit (會提高利潤) but the debit journal entries of expenses, revenues and profit and loss account (而開支，收入及損益

賬的貸方入賬) will reduce the net profit (會減少利潤). For example:

Journal

Details Dr Cr Net profit

(i) Profit and loss – Purchases 279 Decrease


(ii) Profit and loss – Wages 12,800 Decrease

Building 12,800

(iii) Suspense 390 Increase

Profit and loss – Dividend revenue 390

(vi) Accounts payable – D Chen 1,566 Nil

Accounts payable – D Chan 1,566

In public examinations, candidates are usually required to show all the adjustments to the net profit in a statement as follows:

Statement of Corrected Net Profit for the year ended 31 December 2009 $ $

Net profit as per draft accounts 25,800 Add Dividend revenue (iii) 390

26,190

Less Purchases (i) 279

Wages (ii) 12,800 (13,079)

Corrected net profit 13,111

Class work 3

1. (a) Determine whether the following errors would affect the net profit or not and how: (i) A cheque receipt of $1,500 from a debtor, L Kwai, had been correctly recorded in the cash book but had not been

posted to L Kwai’s account. (ii) The purchases journal had been overcast by $200. (iii) The credit side of the discounts received account had been overcast by $930.

(b) Suppose the draft net profit for the year ended 31 December 2009 was calculated to be $25,800. Recalculate the correct

net profit figure.

(a)

Item Effect Reasons understated/overstated

(i) This error affected L Kwai’s account, which is a balance sheet item (accounts receivable) and thus would not affect the net profit for the year.

Nil

(ii) This error affected the purchased account, which is an income statement item and thus would affect the net profit for the year.

Understated

(iii) This error affected the discounts received account, which is an income statement item and thus would affect the net profit for the year.

Overstated

(b)

Statement of Corrected Net Profit for the year ended 31 December 2009

$

Net profit as per draft accounts 25,800

Add Purchases overcast (ii) 200

26,000

Less Discounts received overcast (iii) (930)


The items for adding: (i) Revenue undercast (ii) Expenses overcast The items for deducting: (i) Revenue overcast (ii) Expenses undercast

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2. It is given the following journal entries.

The Journal

Details Dr Cr

$ $

(i) Suspense 5,500

Accounts payable ($500 + $5,000) 5,500

(ii) Bank 8,000

Accumulated depreciation: Machinery 10,000

Profit and loss — Loss on disposal 3,000

Machinery 21,000

(iii) Inventory 2,700

Profit and loss — Closing inventory 2,700

(iv) Drawings 1,000

Suspense 1,000

(v) Y Y Ltd (accounts payable) 2,560

Y Y Ltd (accounts receivable) 2,560

(vi) Bank 1,920

Bad debts 1,920

(vii) Bank 2,500

Profit and loss — Insurance compensation 2,500

(viii) Electricity 500

Accruals 500

If the net profit for the year ended 31 December 2011 had been calculated as $26,700, prepare a statement showing the revised net profit as at the end of the year.

Statement of Revised Net Profit for the year ended 31 December 2011

$ $

Draft net profit 26,700

Add Inventory undercast (iii) 2,700

Bad debts recovered (vi) 1,920

Insurance compensation (vii) 2,500 7,120

33,820

Less Loss on disposal of machinery (ii) 3,000

Electricity accrued (viii) 500 (3,500)

Revised net profit 30,320

3. The accountant CC Company extracted a trial balance as at 31 December 2010 but its totals did not agree. An income

statement for the year ended 31 December 2010 was prepared and a net profit of $479,280 was shown. All the errors made in 2010 were discovered in the following year. (i) Discounts of $840 allowed to a debtor, H Tong, had been posted to the wrong side of the discounts allowed account. (ii) The debit side of the rent account had been undercast by $1,000. (iii) A purchase invoice of $279 had been completely omitted from the books. (iv) A total of $12,800 paid for wages had been incorrectly debited to the buildings account. (v) A receipt of dividend, $390, had been correctly entered in the cash book but nowhere else. (vi) A payment of $1,566 to a creditor, D Chen, had been entered in D Chan’s account. (vii) A payment for motor expenses of $380 had been entered in the motor vehicles account. Depreciation had been charged

on motor vehicles at 10% per annum on cost. (viii) Returns from customer amounting to $1,999 had been entered in the personal accounts only. (ix) A receipt of $940 from a debtor, C Bau, had been correctly recorded in the cash book, but had been posted to her personal

account as $490. (x) A petty cash balance of $116 had been omitted from the trial balance. You are required to: (a) Show the journal entries to correct the errors. (Narrations are not required.) (b) Show the corrections in the suspense account. (c) Calculate the correct figure of net profit for the year ended 31 December 2010.


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(a) Journal

Details Dr Cr

2010 $ $

(i) Dec 31 Profit and loss – Discounts allowed ($840 x 2) 1,680

Suspense 1,680

(ii) “ 31 Profit and loss – Rent 1,000

Suspense 1,000

(iii) “ 31 Profit and loss – Purchases 279


(iv) “ 31 Profit and loss – Wages 12,800

Building 12,800

(v) “ 31 Suspense 390

Profit and loss – Dividend revenue 390

(vi) “ 31 Accounts payable – D Chen 1,566

Accounts payable – D Chan 1,566 (vii) “ 31 Profit and loss – Motor expenses 380

Motor vehicles 380

Accumulated depreciation: Motor vehicles 38

Profit and loss – Depreciation ($380 x 10%) 38

(viii) “ 31 Profit and loss – Returns inwards 1,999

Suspense 1,999

(ix) “ 31 Suspense 450

Accounts receivable – C Bau ($940 – $490 ) 450

(x) “ 31 Petty Cash 116

Suspense 116

(b)

Suspense 2010 $ 2010 $

Dec 31 Balance b/f (balancing figure) 3,955 Dec 31 Discounts allowed (i) 1,680

“ 31 Dividend revenue (v) 390 “ 31 Rent (ii) 1,000

“ 31 Accounts receivable – C Bau (ix) 450 “ 31 Returns inwards (viii) 1,999

“ 31 Petty Cash (x) 116

4,795 4,795

(c)


$ $

Net profit originally shown 479,280

Add Dividend revenue omitted (v) 390

Depreciation on vans overstated (vii) 38 428

479,708

Less Discounts allowed understated (i) 1,680

Rent undercast (ii) 1,000

Purchases omitted (iii) 279

Wages understated (iv) 12,800

Motor expenses understated (vii) 380

Returns inwards omitted (viii) 1,999 (18,138)



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4. On 31 December 2009, a bookkeeper prepared a trial balance which failed to agree by $3,300, with a shortage in the credit total. A suspense account was opened for the difference. In January 2010, the following errors made in 2009 were found: (i) The sales day book had been undercast by $1,000. (ii) Sales of $2,500 to K Heung had been debited to K Hung’s account. (iii) The debit side of the rent account had been undercast by $700. (iv) The credit side of the discounts received account had been undercast by $3,000. (v) The sale of a motor vehicle used in the business (cost $33,600) at a net book value of $3,600 had been credited to the

sales account. No other entries had been made. Required: (a) Show the journal entries necessary to correct the errors. (Narrations are not required.) (b) Draw up the suspense account. (c) If the net profit for the year ended 31 December 2009 had been calculated as $79,000, recalculate the correct figure and

show the workings.

(a) Journal

Details Dr Cr

2009 $ $

(i) Dec 31 Suspense 1,000

Sales 1,000

(ii) Dec 31 K Heung 2,500

K Hung 2,500

(iii) Dec 31 Rent 700

Suspense 700

(iv) Dec 31 Suspense 3,000


(v) Dec 31 Sales 3,600

Motor vehicles disposal 3,600


Motor vehicles 33,600

Accumulated depreciation: Motor vehicles 30,000


(b)

Suspense $ $

Sales (i) 1,000 Balance b/f 3,300

Discounts received (iv) 3,000 Rent (iii) 700

4,000 4,000

(c)


$ $

Net profit as per accounts 79,000

Add Sales undercast (i) 1,000

Discounts received undercast (iv) 3,000 4,000

83,000

Less Rent undercast (iii) 700

Sales overstated (v) 3,600 (4,300)


5. Test 3


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7.5 Adjustments of working capital (營運資金調整) Working capital (營運資金) refers to (是指) the excess of current assets over current liabilities (流動資產高於流動負債的差額).

It can be positive (net current assets) (淨流動資產) or negative (net current liabilities) (淨流動負債). If an error affects current

assets (流動資產) and/or current liabilities (流動負債), working capital would also be affected (營運資金會同樣受到影響).

Usually, the debit journal entries of current assets and current liabilities (流動資產及流動負債的借方入賬) will raise the

working capital (會提高營運資金) but the credit journal entries of current assets and current liabilities (而流動資產及流動負債

的貸方入賬) will reduce the working capital (會減少營運資金). For example:

Journal

Details Dr Cr Working capital

(i) Suspense 1,500 Decrease

Accounts receivable – Charles 1,500

(ii) Suspense 200 Nil

Profit and loss – Purchases 200

(iii) Cash 500 Increase

Suspense 500 In public examinations, candidates are usually required to show all the adjustments to the working capital in a statement as follows:

Statement of Corrected Working Capital as at 31 December 2009

$

Working capital as per draft accounts 78,000

Add Cash balance omitted (iii) 500

78,500

Less Accounts receivable overstated (i) (1,500)

Corrected Working capital 77,000

Class work 4

1. (a) Determine whether the following errors would affect the working capital or not and how: (i) A cheque receipt of $1,500 from a debtor, L Kwai, had been correctly recorded in the cash book but had not been

posted to L Kwai’s account. (ii) The purchases journal had been overcast by $200. (iii) The credit side of the discounts received account had been overcast by $930.

(b) Suppose the draft working capital for the year ended 31 December 2009 was calculated to be $25,800. Recalculate the

correct working capital. (a)

Item Effect Reasons understated/overstated

(i) This error affected and account receivable, which is a current assets and thus would affect the working capital. Overstated

(ii) This error affected the purchased account, which is in income statement. It did not affect the current assets or current liabilities and thus would not affect the working capital.

Nil

(iii) This error affected the discounts received account, which is in income statement item. It did not affect the current assets or current liabilities and thus would not affect the working capital.

Nil

(b)


$


Less Accounts receivable overstated (i) (1,500)


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2. After preparing its final accounts for the year ended 31 March 2007, Babel Company found that the following transactions had been omitted from the books. For each of the omissions, state the change (increase/decrease/no change) in the net profit for the year and the working capital as at the year end after the omission has been corrected.

Net profit for the year ended 31 March 2007

Working capital as at 31 March 2007

Example: Accrued expenses at 31 March 2006 were paid by the proprietor from his own bank account.

No change Increase

(a) A motor vehicle was sold on credit at a profit. Increase Increase

(b) A short-term bank loan, together with the accrued interest on the loan, was prepaid.

No change No change

(c) Goods were purchased by cash for resale. These goods were sold on credit at a loss.

Decrease Decrease

(d) A customer settled his account. The amount received was used to pay a creditor and the electricity expenses of the proprietor’s residence.

No change Decrease

3. It is given the following journal entries:

The Journal

Details Dr Cr

$ $

(i) Suspense 5,500 Accounts payable ($500 + $5,000) 5,500

(ii) Inventory 2,700 Profit and loss — Closing inventory 2,700

(iii) Drawings 1,000

Suspense 1,000

(iv) Bank 1,920 Bad debts 1,920

(v) Electricity 500 Accruals 500

(vi) Accounts receivable – Paul Ho 11,200

Accounts receivable – Paul Hung 11,020

Suspense 180

If the working capital as at the end of the year amounted to $38,000, prepare a statement showing the adjustments to the

working capital as at the end of the year.


$ $


Add Inventory (ii) 2,700

Bank (iv) 1,920

Accounts receivable – Paul Ho (vi) 11,200 15,820

53,820

Less Accounts payable (i) 5,500

Accounts receivable – Paul Hung (vi) 11,020 (16,520)


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4. The trial balance of W Cheung’s business as at 31 December 2010 failed to agree and the difference was recorded in a suspense account. After preparing the draft financial statements for the year, the net profit for the year was calculated to be $102,450 while the working capital as at the end of the year amounted to $28,320.

Subsequent check on the accounting books revealed the following errors: (i) A credit sale of office equipment for $6,200 had been recorded in the sales day book. The office equipment was acquired

for $12,000 on 1 July 2007. Depreciation was charged at 20% per annum on the cost of office equipment. A full year’s depreciation was charged in the year of purchase, while no depreciation was charged in the year of disposal.

(ii) The purchases day book and the returns outwards day book had both been undercast by $1,130. (iii) Discounts received of $257 had been credited to the interest revenue account as $275. (iv) A bad debt recovery of $5,180 had been recorded in the cash book as a receipt from cash sales. The bad debt was written

off a year earlier. (v) Carriage inwards of $3,870 had been credited to the returns inwards account as $3,780. (vi) A Cheque payment of $2,280 for electricity charges had been recorded twice in the electricity account, but was omitted

from the bank account. Required:

(a) Prepare the necessary journal entries to correct the above errors. (b) Show the necessary entries in the suspense account. (c) Prepare a statement showing the adjustments to the net profit for the year. (d) Prepare a statement showing the adjustments to the working capital as at the end of the year.

(a)

Journal

Details Dr Cr

$ $

(i) Profit and loss – Sales 6,200

Disposal – Office equipment 6,200


Office equipment 12,000

Accumulated depreciation – Office equipment ($12,000) 7,200



Profit and loss – Profit on disposal 1,400

Correction of error: Credit sale of office equipment wrongly recorded in sales journal.

Accumulated depreciation – Office equipment 2,400

Profit and loss – Depreciation 2,400

Correction of error: Depreciation overcharged on office equipment that was sold during the year.

(ii) Profit and loss – Purchases 1,130

Profit and loss – Returns outwards 1,130

Correction of error: Both purchases journal and return outwards journal undercast by $1,130.

(iii) Profit and loss – Interest revenue 275

Profit and loss – Discounts received 257

Suspense 18

Correction of error: Discounts received of $257 credited to interest revenue as $275.

(iv) Profit and loss – Sales 5,180

Profit and loss –Bad debt recovered 5,180

Correction of error: Bad debt recovery wrongly recorded as cash sales.

(v) Profit and loss – Returns inwards 3,780

Profit and loss – Carriage inwards 3,870

Suspense 7,650

Correction of error: Carriage inwards of $3,870 credited to returns inwards as $3,780.

(vi) Suspense 4,560

Profit and loss – Electricity 2,280

Bank 2,280

Correction of error: Cheque payment for electricity charges entered twice but omitted in Bank.

15

(b) Suspense

2010 $ 2010 $

Dec 31 Balance b/f (balancing figure) 3,108 Dec 31 Profit and loss – Interest revenue (iii) 18

“ 31 Profit and loss – Electricity (vi) 2,280 “ 31 Profit and loss – Returns inwards (v) 3,780

“ 31 Bank (iv) 2,280 “ 31 Profit and loss – Carriage inwards (v) 3,870

7,668 7,668

(c)


$ $


Add Profit on disposal of office equipment (i) 1,400

Depreciation overcharged (i) 2,400

Returns outwards undercast (ii) 1,130

Discounts received understated (iii) 257

Bad debt recovered understated (iv) 5,180

Electricity charges overstated (vi) 2,280 12,647

115,097

Less Sales overstated (i) 6,200

Purchases undercast (ii) 1,130

Interest revenue overstated (iii) 275

Sales overstated (iv) 5,180

Returns inwards understated (v) 3,780

Carriage inwards understated (v) 3,870 (20,435)


or


$ $


Add Profit on disposal of office equipment (i) 1,400

Depreciation overcharged (i) 2,400

Discounts received understated (iii) 257

Electricity charges overstated (vi) 2,280 6,337

108,787

Less Sales overstated (i) 6,200

Interest revenue overstated (iii) 275

Returns inwards understated (v) 3,780

Carriage inwards understated (v) 3,870 (14,125)


(d)


$


Less Bank overstated (vi) (2,280)


5. Test 4

16

6 A trial balance for the year ended 31 December 2009 was prepared for a business. There was a shortage of $2,920 in the credit

total. A suspense account was opened for the difference. During 2010, the following errors made in 2009 were located. (i) An amount of $550 received from the sale of old office equipment (with a cost of $4,600 and a zero net book value) had

been entered in the sales account. No other entries had been made. (ii) The purchases day book had been overcast by $600. (iii) A private purchases by the owner of $1,150 had been included in business purchases. (iv) Bank charges of $380 entered in the cash book had not been posted to the bank charge account. (v) A sale of good to C Chow amounting to $6,900 had been correctly entered in the sales book but posted to the personal

account as $9,600.

Required: (a) Show the journal entries to correct the errors. (Narrations are not required.) (b) Draw up the suspense account. (c) The net profit for 2009 was originally calculated as $113,700. Recalculate the correct figure and show the workings.

(a) Journal

Date Details Dr Cr

2009 $ $

(i) Dec 31 Sales 550

Disposal 550

Disposal 4,600


Accumulated depreciation: Office equipment 4,600

Disposal 4,600

Disposal 550

Profit and loss — Profit on disposal 550

(ii) “ 31 Suspense 600

Purchases 600

(iii) “ 31 Drawings 1,150

Purchases 1,150

(iv) “ 31 Bank charges 380

Suspense 380

(v) “ 31 Suspense ($9,600 – $6,900) 2,700

C Chow 2,700

(b) Suspense

2009 $ 2009 $

Dec 31 Purchases (ii) 600 Dec 31 Balance b/f 2,920

“ 31 C Chow (v) 2,700 “ 31 Bank charges (iv) 380

3,300 3,300

(c)


$ $

Net profit as per accounts 113,700

Add Gain on disposal of office equipment (i) 550

Purchases overcast (ii) 600

Purchases overstated (iii) 1,150 2,300

116,000

Less Sales overstated (i) 550

Bank charges omitted (iv) 380 (930)


Sales

2009 $ 2009 $ Dec 31 Sales 550 Dec 31 Cash 550

Cash

2009 $ Dec 31 Disposal: Office equipment 550

Disposal: Office equipment

2009 $ 2009 $ Dec 31 Office equipment 4,600 Mar 31 Sales 550

“ 31 Profit and loss – Profit on disposal 550 “ 31 Accumulated depreciation 4,600

5,150 5,150

Office equipment

2009 $ 2009 $ Dec 31 Balance b/f 4,600 Dec 31 Disposal: Office equipment 4,600

Accumulated Depreciation: Office equipment

2009 2009 Dec 31 Disposal: Office equipment 4,600 Dec 31 Balance b/f 4,600

Profit and loss

2009 Dec 31 Disposal: Office equipment 550

17

10X

(vi) Discounts allowed of $380 had been credited to the discounts received account. (vii) A petty cash balance of $500 had been omitted from the trial balance.

(a)

Journal

Date Details Dr Cr

2010 $ $

(i) Dec 31 Bank Interest changes 3,600

Suspense 3,600

(ii) “ 31 Charles 1,325

Suspense 1,325

(iii) “ 31 Equipment 6,000

Purchases 6,000

Depreciation ($6,000 × 20%) 1,200

Accumulated depreciation: Equipment 1,200

(iv) “ 31 Suspense 30

Wing Wah Ltd ($3,830 – $3,800) 30

(v) “ 31 Suspense 180

Sales ($755 – $575) 180

(vi) “ 31 Discounts allowed 380

Discounts received 380

Suspense 760

(vii) “ 31 Petty cash 500

Suspense 500

18

12X (a) The draft accounts of Mayflower Company for the year ended 30 September 2009 showed a net profit of $68,437. Before the preparation of financial statements, there was a difference of $2,670 in the trial balance. A suspense account was opened to record this. Subsequent checking of the records revealed the following: (i) The discounts allowed column in the cash book had been undercast by $1,270. (ii) On 1 October 2008, a cash sale of office equipment for $16,240 had been recorded as a cash sale of goods. No other entries in

respect of this transaction had been made. This piece of office equipment cost $36,000 and had an accumulated depreciation of $28,800 as at 30 September 2009. The company had charged depreciation at a rate of 20% on cost for office equipment appearing in the books as at 30 September 2009.

(iii) Accrued rent of $1,820 as at 30 September 2008 had not been brought forward as an opening balance in the rent and rates account. Prepaid rates of $4,840 on 30 September 2009 had been completely omitted from the trial balance.

(iv) included in the insurance account was a payment for private life insurance of $1,270 out of the business bank account. (v) A cheque for $3,163 in respect of a bad debt written off in the previous year had been banked but not yet entered in the

books. (vi) Accounts receivable were shown as $75,540 (gross). However, a bad debt of $1,140 had not been written off. The existing

allowance for doubtful accounts, $2,200, should have been adjusted to 3% of accounts receivable. (vii) The closing inventory had been overcast by $1,360. (viii) A rebate of bank charges overpaid, $2,360, had been credited to the drawings account. (ix) In September 2009, Mayflower Company bought goods on credit from Rose Ltd for $4,289 and sold goods on credit to the

same company for $2,749. The purchases were correctly recorded in the accounts, but the sales were recorded in Rose Ltd’s account as $2,479. The two accounts of Rose Ltd were to be settled by a contra entry on 30 September 2009.

(x) A credit note from a supplier, Sunny Ltd, for $1,890 had been entered correctly in the relevant day book but had been posted twice to Sunny Ltd’s account.

Required: (a) Show the journal entries necessary for recording the above. (Narrations are not required.) (b) Draw up the suspense account. (c) Calculate the revised net profit for the year ended 30 September 2009.

19

12X (a)

Journal

Details Dr Cr

$ $

(i) Profit and loss — Discounts allowed 1,270

Suspense 1,270

(ii) Profit and loss — Sales 16,240

Disposal 16,240

Disposal 36,000



Profit and loss — Depreciation ($36,000 × 20%) 7,200


Disposal ($28,800 – $7,200) 21,600

Disposal 1,840

Profit and loss — Profit on disposal 1,840

(iii) Suspense 1,820

Profit and loss — Rent and rates 1,820

Suspense 4,840

(iv) Drawings 1,270

Profit and loss — Insurance 1,270

(v) Bank 3,163

Profit and loss — Bad debts recovered 3,163

(vi) Profit and loss — Bad debts 1,140


Profit and loss {[($75,540 – $1,140) × 3%] – $2,200} 32

Allowance for doubtful debts 32

(vii) Profit and loss — Closing inventory 1,360

Inventory 1,360

(viii) Drawings 2,360

Profit and loss — Bank charges 2,360

(ix) Rose Ltd 270

Suspense 270

Rose Ltd (accounts payable ledger) 2,749

Rose Ltd (accounts receivable ledger) 2,749

(x) Suspense 1,890

Sunny Ltd 1,890

(b) Suspense

$ $

Balance b/f (balancing figure) 2,670 Discounts allowed (i) 1,270

Accrued rent (iii) 1,820 Prepaid rates — Trial balance (iii) 4,840

Sunny Ltd (x) 1,890 Rose Ltd (ix) 270

6,380 6,380

Sales

2009 $ 2009 $ Sept 30 Disposal: Office equipment 16,240 Sept 30 Cash 16,240

Cash

2009 $ Sept 30 Disposal: Office equipment 16,240

Disposal: Office equipment

2009 $ 2009 $ Sept 30 Office equipment 36,000 Sept 30 Sales 16,240

“ 30 Profit and loss – Profit on disposal 1,840 “ 30 Accumulated depreciation 21,600

37,840 37,840

Office equipment

2009 $ 2009 $ Sept 30 Balance b/f 36,000 Sept 30 Disposal: Office equipment 36,000

Depreciation: Office equipment

2009 $ 2009 $ Sept 30 Accumulated depreciation: Office equipment 7,200 Sept 30 Accumulated depreciation: Office equipment 7,200

Accumulated Depreciation: Office equipment

2009 $ 2009 $ Sept 30 Depreciation: Office equipment 7,200 Sept 30 Balance b/f 28,800

“ 30 Disposal: Office equipment 21,600

28,800 28,800

Profit and loss

2009 $ Sept 30 Disposal: Office equipment 550

20

(c) Statement of Revised Net Profit for the year ended 30 September 2009

$ $

Original net profit 68,437

Add Depreciation overstated (ii) 7,200

Profit on disposal omitted (ii) 1,840

Rent overstated (iii) 1,820

Insurance overstated (iv) 1,270

Bad debt recovered omitted (v) 3,163

Bank charges overstated (viii) 2,360 17,653

86,090

Less Discounts allowed undercast (i) 1,270

Sales overstated (ii) 16,240

Bad debts omitted (vi) 1,140

Increase in allowance for doubtful accounts (vi) 32

Closing inventory overcast (vii) 1,360 (20,042)

Revised net profit 66,048

chapter 7 correction of errors [ii]: errors affecting …proxy.flss.edu.hk/~flssmcwong/s5...

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