Question

Below are three independent and unrelated errors.

On December 31, 2017, Wolfe-Bache Corporation failed to accrue office supplies expense of $1,300. In January 2018, when it received the bill from its supplier, Wolfe-Bache made the following entry:

Office supplies expense 1,300

Cash 1,300

On the last day of 2017, Midwest Importers received a $80,000 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 $7,000 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.

Answer 1

• Working and Requirement 1

Error	Effect on Income Statement 2017	Effect on Balance Sheet 2017
Office Supplies expense not accrued in 2017 of $1300.	Since, expenses are not accrued in 2017, the Net Income will be overstated by amount of $1300	If the Office Supplies expenses have been accrued, the account of Supplies in Balance Sheet would have been recorded at $1300 more.
$80000 received for next year rent (2018), recorded as income in 2017	Revenues will be overstated by $80000 and so will be the Net Income	Retained Earnings will be overstated by $80000. Also if the amount has been correctly recorded, $80000 would be appearing on asset side as ‘Unearned Revenue’
$7000 interest revenue failed to get accrued in 2017	This will lead to a shortfall or understatement of Net Income by $7000	Retained Earnings will be understated by $7000. Accrued interest of $7000 will not be appearing.

• Journal Entries [Requirement 2] for removing 2018 Errors.

Accounts Title	Dr (in $)	Cr (in $)
Retained Earnings	1300
Office Supplies expenses		1300
Retained Earnings	80000
Rent Revenue		80000
Interest Revenue	7000
Retained earnings		7000