Question

Scobie Company began 2016 with a retained earnings balance of $142,400. During an examination of its accounting records on December 31, 2016, Scobie found it had made the following material errors, for both financial reporting and income tax reporting, during 2015.

1.	Depreciation expense of $15,000 inadvertently had been recorded twice for the same machine.
2.	No accrual had been made at year-end for interest; therefore, interest expense had been understated by $4,000.

Scobie’s net income after taxes during 2016 was $60,000. The company has been subject to a 30% income tax rate for the past several years. It declared and paid dividends of $13,000 during 2016.

Required:

1.	Prepare whatever journal entries in 2016 are necessary to correct Scobie’s books for its previous errors. Make your corrections directly to the Retained Earnings account.
2.	Prepare the statement of retained earnings for 2016.

General Journal

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Prepare whatever journal entries are necessary to correct Scobie’s books for its previous errors. Make your corrections directly to the Retained Earnings account on December 31. Additional Instructions

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PAGE 1

GENERAL JOURNAL

Score: 82/101

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT
1	✔	✔		✔
2		✔			✔
3	✔	✔		✔
4		✔			✔
5		✔
6		✔
7	✔	✔
8

Points:

16.24 / 20

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Check My Work

To correct a prior period that has been closed, adjust the book values of the assets and liabilities so that their balances reflect the correct amounts. An offsetting adjustment is made to Retained Earnings for the cumulative effect of the adjustments for prior periods. In this problem you are instructed to record two entries rather than a compound entry so your journal should contain four entries for this problem.

Balance Sheet

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Prepare Scobie Company’s Statement of Retained Earnings for the year ended December 31, 2016. Additional Instructions

Score: 4/31

SCOBIE COMPANY

Statement of Retained Earnings

For Year Ended December 31, 2016

1	Retained Earnings, as Previously Reported, January 1, 2016	✔
2	Prior Period Adjustments:
3	Correction of Overstatement in 2015 Depreciation
4	Correction of Understatement in 2015 Interest
5	Adjusted Retained Earnings, January 1, 2016
6	Add: Net income
7
8	Less: Cash Dividends
9	Retained Earnings, December 31, 2016

Answer 1

Solution

Scobie Company

1. Journal Entries to correct Scobie’s books for its previous errors:

Scobie Company
Journal Entries
Date	Account Titles and Explanation	Ref. No.	Debit	Credit
31-Dec	Accumulated Depreciation		$15,000
	Retained Earnings			$15,000
	(To reverse prior period error of recording depreciation expense twice)
31-Dec-16	Retained Earnings		$4,000
	Interest Expense			$4,000
	(To reverse prior period error of not recording accrued interest expense)

2. Statement of Retained Earnings for the year ended December 31, 2016:

Scobie Company
Statement of Retained Earnings for the Year Ended December 31, 2016
Retained Earnings as previously reported, January 1, 2016		$142,400
Prior period adjustments:
Correction of overstatement in 2015 depreciation	$15,000
Correction of understatement in 2015 interest	($4,000)	$11,000
Adjusted retained earnings, January 1, 2016		$153,400
Add: Net Income		$60,000
		$213,400
Less: Cash dividends		($13,000)
Retained Earnings, December 31, 2016		$200,400