Question

Below are three independent and unrelated errors.

On December 31, 2017, Wolfe-Bache Corporation failed to accrue office supplies expense of $2,100. In January 2018, when it received the bill from its supplier, Wolfe-Bache made the following entry:

Office supplies expense	2,100
Cash		2,100

On the last day of 2017, Midwest Importers received a $96,000 prepayment from a tenant for 2018 rent of a building. Midwest recorded the receipt as rent revenue.

At the end of 2017, Dinkins-Lowery Corporation failed to accrue interest of $8,600 on a note receivable. At the beginning of 2018, 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 2017 financial statements?
2. Prepare any journal entries each company should record in 2018 to correct the errors.

Error A:

Income statement: (Expenses overstated, Expenses understated, Revenues overstated, Revenues understated) (Net income overstated, Net income understated)

Balance Sheet: (Assets overstated, Assets understated, Liabilities overstated, Liabilities understated) (Retained earnings overstated, Retained earnings understated)

Error B:

Income statement: (Expenses overstated, Expenses understated, Revenues overstated, Revenues understated) (Net income overstated, Net income understated)

Balance Sheet: (Assets overstated, Assets understated, Liabilities overstated, Liabilities understated) (Retained earnings overstated, Retained earnings understated)

Error C:

Income statement: (Expenses overstated, Expenses understated, Revenues overstated, Revenues understated) (Net income overstated, Net income understated)

Balance Sheet: (Assets overstated, Assets understated, Liabilities overstated, Liabilities understated) (Retained earnings overstated, Retained earnings understated)

1. Record the correction of the office supply error:

2. Record the correction of Rent Received in Advance:

3. Record correction of Interest Revenue on Note Receivable:

Answer 1

• Requirement 1

Error A:

INCOME STATEMENT: Expenses Understated and Net Income Overstated. This is because expense of $2100 was not recorded in 2017.

BALANCE SHEET: Liabilities understated because had the accrual entry been passed, liability of $2100 as ‘payable’ would have been recorded.

Error B:

INCOME STATEMENT: Revenues overstated and Net Income Overstated. This is because rental income of $96000 is a revenue for 2018 not for 2017.

BALANCE SHEET: Liabilities understated because had the correct entry been passed, Liabilities of $96000 as ‘Unearned revenue’ would have been recorded.

Error C:

INCOME STATEMENT: Revenues Understated and Net Income Understated. This is because interest revenue of $8600 for 2017 was not recorded in 2017 but recorded in 2018.

BALANCE SHEET: Assets understated because had the accrual entry been passed, Assets of $8600 as ‘interest receivables’ would have been recorded.

• Requirement 2: Entries correcting the wrong entries, entries MADE in 2018

Accounts titles	Debit	Credit
Retained earnings	$              2,100
Expense payable		$              2,100
(Expenses wrongly debited now corrected)
Retained earnings	$            96,000
Rental Revenue		$            96,000
(revenues recorded correctly)
Interest Revenue	$              8,600
Retained earnings		$              8,600
(revenues wrongly credited, now debited)