Question

Cherokee Company's auditor discovered some errors. No errors were corrected during 2015. The errors are described as follows:

(1.)	Beginning inventory on January 1, 2015, was understated by $5,000.
(2.)	A two-year insurance policy purchased on April 30, 2015, in the amount of $18,600 was debited to Prepaid Insurance. No adjustment was made on December 31, 2015, or on December 31, 2016.

Required:

Prepare appropriate journal entries (assume the 2016 books have not been closed). Ignore income taxes. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) Transaction List: 1 Beginning inventory on January 1, 2015, was understated by $5,000. 2 A two-year insurance policy purchased on April 30, 2015, in the amount of $18,600 was debited to Prepaid Insurance. No adjustment was made on December 31, 2015, or on December 31, 2016.

Answer 1

Transaction	Accounts Title & Explanation	Debit	Credit
1	No journal entry required [ Note 1]
2	Insurance Expense [($18,600 / 24) * 12 ]	9,300
	Retained Earnings [($18,600 / 24) * 8 ]	6,200
	Prepaid Insurance		15,500
	[ To record rectification entry]

[ Note 1] : Since beginning inventory on January 1, 2015, was understated that means ending inventory on December 31 , 2014 was overstated by the same amount. Thus understatement & overstatement will nullify each others impact resulting in no effect on retained earning balance. Therefore no entry is required.