Question

Exercise 20-23 (Algo) Error correction; three errors [LO20-6]

Below are three independent and unrelated errors.

1. On December 31, 2020, Wolfe-Bache Corporation failed to accrue salaries expense of $2,300. In January 2021, when it paid employees for the December 27–January 2 workweek, Wolfe-Bache made the following entry:
   

Salaries expense	2,300
Cash		2,300

2. On the last day of 2020, Midwest Importers received a $100,000 prepayment from a tenant for 2021 rent of a building. Midwest recorded the receipt as rent revenue. The error was discovered midway through 2021.
3. At the end of 2020, Dinkins-Lowery Corporation failed to accrue interest of $9,000 on a note receivable. At the beginning of 2021, when the company received the cash, it was recorded as interest revenue.

Required:
For each error:

1. What would be the effect of each error on the income statement and the balance sheet in the 2020 financial statements?

error A

income Statement	?	?
balance sheet	?	?

error B

income Statement	?	?
balance sheet	?	?

error C

income Statement	?	?
balance sheet	?	?

2. Prepare any journal entries each company should record in 2021 to correct the errors.

Answer 1

Answer to Q1					Answer to Q2
	Understatement/ Overstatement in 2020	Item	Amount		Journal Entries
Error A Wolfe					Date
Income statement	Understated	Salaries expense	$         2,300		2-Jan-21	Retained earnings	Dr	$        2,300
Income statement	Overstated	Profit for the year trf to retained earnings	$         2,300			Salaries expense	Cr	$       (2,300)
Balance Sheet	Understated	Accrued Salaries- Current liabilities	$         2,300			(Reversal of salary expense in 2021 and adjusted in retained earnings as it pertains to prior year)
Balance Sheet	Overstated	Profit for the year trf to retained earnings	$         2,300
Error B Midwest
Income statement	Overstated	Rent revenue	$     100,000		30-Jun-21	Rent revenue	Dr	$       50,000
Income statement	Overstated	Profit for the year trf to retained earnings	$     100,000			Rent received in advance- Current liabilities	Cr	$      (50,000)
Balance Sheet	Understated	Rent received in advance- Current liabilities	$     100,000			(Reversal of rent received for half of the year as it pertains to next half)
Balance Sheet	Overstated	Profit for the year trf to retained earnings	$     100,000
Error C- Dinkins Lowery
Income statement	Understated	Interest revenue	$         9,000			Interest revenue	Dr	$        9,000
Income statement	Understated	Profit for the year trf to retained earnings	$         9,000			Retained earnings	Cr	$       (9,000)
Balance Sheet	Understated	Interest receivable- Current assets	$         9,000			(Reversal of interest revenue in 2021 and adjusted in retained earnings as it pertains to prior year)
Balance Sheet	Understated	Profit for the year trf to retained earnings	$         9,000