Journal Date Details Dr Cr 2010 $ $ May 31 H Lin 6,780 H Lui 6,780

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1 Chapter 6 Correction of Errors [I]: Errors Not Affecting Trial Balance Agreement 6.1 Introduction Both the trial balance and the control accounts are used to test the arithmetical accuracy of entries ( 運算準確性 ) and as an internal control mechanism in accounting. However, some errors would not affect trial balance agreement ( 不影響試算表的平衡 ) and thus cannot be detected by a trial balance ( 不能靠試算表檢查出來 ). 6.2 Error of commission ( 帳名調亂錯誤 ) An error of commission is where an entry has been made in a wrong account of the same type ( 交易錯誤記錄在同一類別的另一個帳戶 ). For example, if a trade debtor, P Lau, paid us $500 by cheque on 18 May 2010 but the receipt was wrongly credited to P Lee s account, instead of P Lau s account. This type of error is called an error of commission. The error in the above example would not affect the agreement of a trial balance ( 不影響試算表的平衡 ), as both the debit and credit entries were of the same amount ( 因為借方和貸方記帳的金額相同 ). To correct errors in ledger accounts, we first need to record the correcting entries in the journal ( 在日記簿作更正分錄 ) and then post the entries to the ledger accounts ( 把更正分錄過帳到分類帳帳戶內 ). If the error was found on 31 May 2010, the error should be corrected as follows: Step 1 Record the correcting entries in the journal ( 第一步在日記簿作更正分錄 ) 2010 May 31 P Lee 500 P Lau 500 Correction of error: Receipt from P Lau wrongly posted to P Lee s account Step 2 Post the correcting entries to the ledger accounts ( 第二步把更正分錄過帳到分類帳帳戶內 ) Accounts Receivable Ledger P Lee May 31 P Lau Error correction 500 May 18 Bank 500 P Lau May 31 P Lee Error correction 500 P Lee s account was debited in order to offset ( 抵銷 ) the incorrect credit entry in his account, while P Lau s account was credited in order to make the correct entry in his account. Class work 1 1. A sale of goods for $6,780 to H Lin had been entered in H Lui s account on 15 May Show the journal entries and ledger to correct it if the error was found on 31 May Narrations are not required May 31 H Lin 6,780 H Lui 6,780 Accounts Receivable Ledger H Lui May 15 Sales 6,780 May 31 H Lin Error correction 6,780 H Lin May 31 H Lui Error correction 6,780 Name : Serial No: 2. A medical claim by a staff member for $400 had been recorded in the motor expenses column. Medical expenses 400 Motor expenses 400 1

2 6.3 Error of principle ( 原則性錯誤 ) An error of principle is where an entry has been made in a wrong type of account ( 錯誤記錄在另一類別的帳戶內 ). For example, if we bought a lorry for $55,000 by cheque on 14 May 2010 but the value of the lorry was wrongly debited as an expense account instead of an asset account. The error in the above example would not affect the agreement of a trial balance ( 不影響試算表的平衡 ), as both the debit and credit entries were of the same amount ( 因為借方和貸方記帳的金額相同 ). To correct errors, we first need to record the correcting entries in the journal and then post the entries to the ledger accounts. If the error was found on 31 May 2010, the error should be corrected as follows: Step 1 Record the correcting entries in the journal ( 第一步在日記簿作更正分錄 ) 2010 May 31 Lorries 55,000 Motor expense 55,000 Correction of error: Purchases of a lorry wrongly posted to motor expense account Step 2 Post the correcting entries to the ledger accounts ( 第二步把更正分錄過帳到分類帳帳戶內 ) General Ledger Motor expenses May 14 Bank 55,000 May 31 Lorries Error correction 55,000 Lorries May 31 Motor expenses Error correction 55,000 The motor expenses account was credited in order to offset the incorrect debit entry in his account, while the lorries account was debited in order to make the correct entry in this account. Class work 2 1. The purchase of a van for $38,000 in cash had been entered in the motor expenses account on 10 March Show the journal entries and ledger to correct it if the error was found on 31 March Narrations are not required Mar 31 Vans 38,000 Motor expenses 38,000 General Ledger Motor expenses Mar 10 Cash 38,000 Mar 31 Vans Error correction 38,000 Vans May 31 Motor expenses Error correction 38, A cheque of $1,890 for advertisement payment had been entered in the cash column of the cash book on 3 December Show the journal entries to correct it if the error was found on 31 December Narrations are not required Dec 31 Cash 1,890 Bank 1,890 2

3 6.4 Error of omission ( 遺漏錯誤 ) An error of omission is where no entry has been made for a transaction ( 漏記交易項目 ). For example, if we bought goods on credit from T Hui for $2,500 on 12 May 2010 but no entries were made in our books to record this transaction. The error in the above example would not affect the agreement of a trial balance ( 不影響試算表的平衡 ), as no entries were made in the ledger accounts ( 因為借方和貸方皆沒有記帳 ). To correct errors, we remake the omitted entries by recording the correcting entries in the journal and then post the entries to the ledger accounts. If the error was found on 31 May 2010, the error should be corrected as follows: Step 1 Record the correcting entries in the journal ( 第一步在日記簿作更正分錄 ) 2010 May 31 Purchases 2,500 T Hui 2,500 Correction of error: Credit purchases from T Hui not recorded. Step 2 Post the correcting entries to the ledger accounts ( 第二步把更正分錄過帳到分類帳帳戶內 ) General Ledger Purchases May 31 T Hui Error correction 2,500 Accounts Payable Ledger T Hui May 31 Purchases Error correction 2,500 Class work 3 1. The purchase of a machine on credit from L Po for $43,900 had been completely omitted from the books on 18 March Show the journal entries and ledger to correct it if the error was found on 31 March Narrations are not required Mar 31 Machinery 43,900 L Po 43,900 General Ledger Machinery Mar 31 L Po Error correction 43,900 Accounts Payable Ledger L Po Mar 31 Machinery Error correction 43, Accrued rental expenses of $5,210 were omitted from the books on 8 December Show the journal entries to correct it if the error was found on 31 December Narrations are not required Dec 31 Rental expenses 5,210 Accrued rental expenses 5,210 3

4 6.5 Error of original entry ( 原始分錄錯誤 ) An error of original entry is where an incorrect amount has been entered in a book of original entry ( 在原始分錄簿錯記金額 ) and therefore the posting to ledger accounts is made with that incorrect amount ( 因此過帳到分類帳帳戶的金額也不正確 ). For example, if we sold goods on credit to T Lo for $1,500 on 13 May 2010 but the debtor s account and the sales account were wrongly debited and credited with $1,300 instead of $1,500. The error in the above example would not affect the agreement of a trial balance, as both the debit and credit entries were of the same amount. To correct errors, T Lo s account and the sales account were debited and credited, respectively, in order to add back the understated amount ($200) to these accounts. If the error was found on 31 May 2010, the error should be corrected as follows: Step 1 Record the correcting entries in the journal ( 第一步在日記簿作更正分錄 ) 2010 May 31 T Lo 200 Sales 200 Correction of error: Credit sales of $1,500 wrongly posted as $1,300 Step 2 Post the correcting entries to the ledger accounts ( 第二步把更正分錄過帳到分類帳帳戶內 ) Accounts Receivable Ledger T Lo May 13 Sales 1,300 May 31 Sales Error correction 200 General Ledger Sales May 13 T Lo 1,300 May 31 T Lo Error correction 200 Class work 4 1. A sale of goods for $2,210 to C Fung had been entered in the sales journal as $2,120 on 18 March Show the journal entries and ledger to correct it if the error was found on 31 March Narrations are not required Mar 31 C Fung ($2,210 $2,120) 90 Sales 90 Accounts Receivable Ledger C Fung Mar 18 Sales 2,120 Mar 31 Sales Error correction 90 General Ledger Sales May 18 C Fung 2,120 May 31 C Fung Error correction Purchases of $8,900 on credit from K Li had been entered in the purchases journal as $9,900 on 8 December Show the journal entries to correct it if the error was found on 31 December Narrations are not required Dec 31 K Li ($9,900 $8,900) 1,000 Purchases 1,000 4

5 6.6 Complete reversal of entries ( 顛倒入帳 ) Complete reversal of entries is where a double entry has been made on the wrong sides of ledger accounts ( 顛倒入帳是指顛倒 了分類帳帳戶的借方和貸方 ). For example, if we paid $2,000 cash to a trade creditor, D Cheung, on 28 May The cash account was wrongly debited and the creditor s account was wrongly credited. This error would not affect the agreement of a trial balance, as both the debit and credit entries were of the same amount. If the error was found on 31 May 2010, the error should be corrected as follows: Step 1 Record the correcting entries in the journal ( 第一步在日記簿作更正分錄 ) 2010 May 31 D Cheung 4,000 Cash 4,000 Correction of error: Cash payment to D Cheung wrongly debited to cash account and credited to D Cheung s account. Step 2 Post the correcting entries to the ledger accounts ( 第二步把更正分錄過帳到分類帳帳戶內 ) Accounts Payable Ledger D Cheung May 31 Cash Error correction 4,000 May 28 Cash 2,000 General Ledger Cash May 28 D Cheung 2,000 May 31 D Cheung Error correction 4,000 Class work 5 1. A cash payment of $8,000 to H Kwong had been entered on the debit side of the cash book and the credit side of H Kwong s account on 28 May Show the journal entries and ledger to correct it if the error was found on 31 May May 31 H Kwong 16,000 Cash 16,000 Accounts Payable Ledger H Kwong May 31 Cash Error correction 16,000 May 28 Cash 8,000 General Ledger Cash May 28 H Kwong 8,000 May 31 H Kwong Error correction 16, Sales of $1,250 had been entered on the wrong side of the sales and debtor s account on 8 December Show the journal entries to correct it if the error was found on 31 December Narrations are not required Dec 31 Debtor ($1,250 x 2) 2,500 Sales 2,500 5

6 6.7 Compensating errors ( 抵銷性錯誤 ) Compensating errors are where two or more errors cancel out each other ( 抵銷性錯誤是指當兩個或以上的錯誤互相抵銷 ) so that trial balance agreement is not affected ( 使試算平衡不會受到影響 ). For example, if the monthly total in the purchases journal was overcast as $80,000 instead of $79,000, while the monthly total in the sales journal was overcast as $100,000 instead of $99,000 at the end of May Therefore, the purchases account was debited with an additional $1,000 and the sales account was also credited with an additional $1,000. These two errors would offset each other and the trial balance would still agree. If the errors were found on 15 June 2010, the error should be corrected as follows: Step 1 Record the correcting entries in the journal ( 第一步在日記簿作更正分錄 ) 2010 Jun 15 Sales 1,000 Purchases 1,000 Correction of error: Both purchases and sales overcast by $1,000 Step 2 Post the correcting entries to the ledger accounts ( 第二步把更正分錄過帳到分類帳帳戶內 ) General Ledger Purchases May 31 Total for the month 80,000 Jun 15 Sales Error correction 1,000 Sales Jun 15 Purchases Error correction 1,000 May 31 Total for the month 100,000 Class work 6 1. If the monthly total of the returns inwards was $8,000 and the monthly total of the returns outwards was $120,000 on 31 May 2010 but both accounts had been overcast by $2,000. Show the journal entries and ledger to correct it if the error was found on 31 May May 31 Returns outwards 2,000 Returns inwards 2,000 General Ledger Returns outwards May 31 Returns inwards Error correction 2,000 May 31 Total for the month 120,000 Returns inwards May 31 Total for the month 8,000 May 31 Returns outwards Error correction 2, Both the rent revenue and motor expense had been undercast by $200 on 8 December Show the journal entries to correct it if the error was found on 31 December Narrations are not required Dec 31 Motor expense 200 Rent revenue 200 6

7 Errors in nominal accounts after closing entries ( 名義賬戶關閉後的錯誤 ) If errors affecting nominal accounts (such as revenue and expense accounts) are found after closing entries have been made at the end of an accounting period ( 如果一些影響名義帳戶的錯誤在會計期結束後被發現 ), they should not be corrected in the nominal accounts ( 他們不應該在名義帳戶內糾正 ) because these accounts have been closed off ( 因為這些名義帳戶已被封閉 ). Instead, these errors should be corrected directly in the profit and loss account ( 相反, 這些錯誤應該直接在損益表糾正內 ). For example, if we bought a lorry for $55,000 by cheque on 14 May 2010 but the value of the lorry was wrongly debited as an expense account instead of an asset account. If the error was found at the end of accounting year, the error should be corrected as follows: Step 1 Record the correcting entries in the journal ( 第一步在日記簿作更正分錄 ) 2010 Dec 31 Lorries 55,000 Profit and loss Motor expenses 55,000 Step 2 Post the correcting entries to the ledger accounts ( 第二步把更正分錄過帳到分類帳帳戶內 ) General Ledger Lorries 2010 Dec 31 Profit and loss Motor expenses $ 55,000 Profit and loss 2010 Dec 31 Lorries Motor expenses $ 55, Errors in year-end adjustments ( 期末調整的錯誤 ) Adjustments are required for the following items at the end of an accounting period: Valuation of inventory (Closing inventory) ( 存貨計價的錯誤 ) Depreciation of non-current assets ( 折舊計算的錯誤 ) Allowance for doubtful accounts ( 呆帳準備的錯誤 ) Accruals and prepayments ( 處理應計和預付項目的錯誤 ) 1 Errors in the valuation of inventories ( 存貨計價的錯誤 ) If the closing inventory was valued at $20,000 at the end of an accounting period, we made the following entries: Inventory $ Profit and loss 20,000 Profit and loss $ Inventory 20,000 However, it was later found that the closing inventory had been overvalued by $2,000. The correcting entries would be: Profit and loss Closing inventory 2,000 Inventory 2,000 Correction of error: Closing inventory overvalued by $2,000 Class work 7 The closing inventory had been undercast by $800. Show the journal entries to correct it. Narrations are not required. Inventory 800 Profit and loss Closing inventory 800 7

8 2 Errors in the charging of depreciation ( 折舊計算的錯誤 ) If the depreciation of $4,000 was charged on machinery, we made the following entries: Depreciation: Machinery Accumulated depreciation: Machinery 4,000 Accumulated depreciation: Machinery Depreciation: Machinery 4,000 However, it was later found that the depreciation had been overcharged by $400. The correcting entries for the error would be: Accumulated depreciation: Machinery 400 Depreciation: Machinery* (Profit and loss Depreciation) 400 Correction of error: Depreciation on machinery overcharged. Note: If the depreciation charged account had been closed off, the entry would have been made in the profit and loss account. Class work 8 Depreciation on office furniture had been overcharged by $2,000. Show the journal entries to correct it if the depreciation charged account for office furniture is closed. Narrations are not required. Accumulated depreciation: Office furniture 2,000 Profit and loss Depreciation 2,000 3 Errors in the allowance for doubtful accounts ( 呆帳準備的錯誤 ) If the allowance for doubtful accounts was increased by $2,300, we made the following entries: Profit and loss Allowance for doubtful accounts 2,300 Allowance for doubtful accounts Profit and loss Increase in allowance for doubtful accounts $2,300 2,300 However, it was later found that the allowance for doubtful accounts should have been increased by $3,200. The correcting entries for the error would be: Profit and loss Increase in allowance for doubtful accounts ($3,200 $2,300) 900 Allowance for doubtful accounts 900 Correction of error: Allowance for doubtful accounts undercharged. Class work 9 The allowance for doubtful accounts should have been increased by $4,200 instead of $2,400. Show the journal entries to correct it. Narrations are not required. Profit and loss Increase in allowance for doubtful accounts ($4,200 $2,400) 1,800 Allowance for doubtful accounts 1,800 8

9 4 Errors in the treatment of accruals and prepayments ( 處理應計和預付項目的錯誤 ) If the rent payment during the whole period amounted to $80,000 by cheque and rent expense account was adjusted for an accrual of $14,000 at the end of an accounting period, we made the following entries: Rent Expense Bank 80,000 Profit and loss 94,000 Accrued c/f 14,000 94,000 94,000 Accrued b/f 14,000 However, it was later found that the accrual should have been a prepayment of rent. The correcting entries for the error would be: Rent Expense Profit and loss 28,000 Accrued b/f 14,000 Prepaid c/f 14,000 28,000 28,000 Prepaid b/f 14,000 Alternative method Rent Expense Bank 80,000 Profit and loss 94,000 Accrued rent expense 14,000 94,000 94,000 Accrued rent expense $ Rent expense 14,000 However, it was later found that the accrual should have been a prepayment of rent. The correcting entries for the error would be: Accrued rent expense 14,000 Prepaid rent expense 14,000 Rent expense* (Profit and loss Rent expenses) 28,000 Correction of error: Prepayment of rent wrongly treated as an accrual. Note: If the rent expense account had been closed off, the credit entry would have been made in the profit and loss account. Accrued rent expense Rent expense 14,000 Rent expense 14,000 Prepaid rent expense $ Rent expense 14,000 Rent Expense Profit and loss 28,000 Accrued rent expense 14,000 Prepaid rent expense 14,000 28,000 28,000 Class work 10 An accrued expense of $500 had been recorded as an accrued revenue and the expenses and revenues accounts are closed. Profit and loss revenue/expense 1,000 Accrued revenue 500 Accrued expense 500 9

10 Class work For each of the independent situations described below, prepare journal entries to show the necessary adjustment. Narrations are not required. (i) Rental income of $4,355 represented the amount received for sub-letting part of the office premises for 13 months from 1 January 2011 to 31 January (ii) An insurance premium of $2,190 was prepaid for the three months ended 31 March (iii) Accrued rental expenses of $5,210 and prepaid insurance expenses of $2,100 were omitted from the books. (iv) An accrued expense of $700 had been recorded as a prepaid expense and the expenses accounts are closed. (v) The accrued expenses of $180 should have been prepaid expenses and the expenses accounts are closed. (vi) The firm had $11,250 in wages and salaries outstanding as at 31 March 2010 but this had not been recorded and the wages and salaries account is closed. (vii) As at 31 December 2010, prepaid rent and accrued telephone expenses amounted to $500 and $300, respectively. No entry had been made in the books and the expenses accounts are closed. (viii) As at 30 April 2010, prepaid repair costs and accrued rent revenue amounted to $210 and $1,700, respectively. No entry had been made in the books. (ix) As at 30 June 2012, prepaid wages and accrued miscellaneous expenses were $1,000 and $1,300, respectively. No entry had been made in the books and the expenses accounts are closed.. (i) Rental income ($4,355 x 1/13) 335 Unearned revenue 335 (ii) Prepaid expenses 2,190 Insurance 2,190 (iii) Rental expenses 5,210 Accrued rental expenses 5,210 Prepaid insurance expenses 2,100 Insurance expenses 2,100 (iv) Profit and loss Expenses ($700 x 2) 1,400 Prepaid expense 700 Accrued expense 700 (v) Accrued expenses 180 Prepaid expenses 180 Profit and loss ($180 x 2) 360 (vi) Profit and loss Wages and salaries 11,250 Accrued expenses 11,250 (vii) Prepaid expenses 500 Profit and loss Rent 500 Profit and loss Telephone expenses 300 Accrued expenses 300 (viii) Prepaid expenses 210 Repair costs 210 Accrued revenue 1,700 Rent revenue 1,700 (ix) Prepaid expenses 1,000 Profit and loss Wages and salaries 1,000 Profit and loss Miscellaneous expenses 1,300 Accrued expenses 1,300 10

11 2. For each of the independent situations described below, prepare journal entries to show the necessary adjustment. Narrations are not required. (i) After inventory was taken at the year-end date, the closing inventory was determined to be $314,800. The bookkeeper recorded it in the books as follows: Dr Profit and loss account $318,400 Cr Inventory account $318,400 (ii) Accrued rental expenses of $5,210 and prepaid insurance expenses of $2,100 were omitted from the books. (iii) Depreciation for office equipment was overcharged by $3,800. (iv) The bank made a payment of $6,443 under a standing order for a subscription to a trade association. The item had been debited to the wages account. (v) A bad debt recovered in the amount of $880 was for a debt written off earlier in the same financial year. No record was made of the recovery. (vi) A cheque for $2,220 was drawn by the business at the year-end date but had not yet been presented for payment. (i) Inventory ($318,400 + $314,800) 633,200 Profit and loss Closing inventory 633,200 (ii) Rental expenses 5,210 Accrued rental expenses 5,210 Prepaid insurance expenses 2,100 Insurance expenses 2,100 (iii) Accumulated depreciation: Office equipment 3,800 Depreciation: Office equipment 3,800 (iv) Subscriptions 6,443 Wages 6,443 (v) Account receivable 880 (vi) Bad debts 880 No journal entry is required 11

12 3. F Mok, a wholesaler, does not know much about accounting. He has drawn up the following trial balance for his business. F Mok Trial Balance as at 31 December 2009 Dr Cr Inventory as at 1 January ,000 Inventory as at 31 December ,400 Purchases 10,000 Sales 22,000 Office equipment (net) 10,000 Furniture and fittings (net) 20,000 Bank 6,000 Accounts receivable 3,600 Accounts payable 2,400 Office expenses 4,000 Sundry expenses 2,500 Capital 34,700 62,300 62,300 Required: (a) After the preparation of the trial balance, the following errors were found: (i) Repairs to office equipment for $500 had been entered in the office equipment account. (ii) Both the sales and purchases accounts had been overcast by $200. (iii) A sundry expense of $100 should have been accrued. Show the journal entries to correct the above errors. (b) Prepare a corrected trial balance as at 31 December (a) (i) Office expenses 500 Office equipment 500 (ii) Sales 200 Purchases 200 (iii) Sundry expenses 100 Accrued expenses 100 (b) F Mok Corrected Trial Balance as at 31 December Dr Cr Inventory as at 1 January ,000 Purchases ($10,000 $200) 9,800 Sales ($22,000 $200) 21,800 Office equipment (net) ($10,000 $500) 9,500 Furniture and fittings (net) 20,000 Bank 6,000 Accounts receivable 3,600 Accounts payable 2,400 Office expenses ($4,000 + $500) 4,500 Sundry expenses ( ) 2,600 Accrued expenses 100 Capital 34,700 62,300 62,300

13 4. The following trial balance was extracted from Dolce Enterprise s books as at 31 December 2011: Dr Cr Capital as at 1 January ,000 5% bank loan 150,000 Non-current assets 270,300 Purchases 733,500 Sales 1,149,750 Inventory as at 1 January ,800 Loan interest 7,500 Accounts receivable 181,900 Accounts payable 164,200 Bank 123,350 Bad debts 1,800 Water and electricity 7,000 Carriage outwards 2,255 Rental income 4,355 Returns outwards 7,950 Rent, rates and insurance 201,000 Salaries and wages 148,050 General expenses 7,800 1,776,255 1,776,255 Inventory as at 31 December 2011 was valued at $90,855. After the preparation of the trial balance, the following errors were discovered: (i) A credit purchase of $1,500 had been completely omitted. (ii) A credit sale of goods to Miss Fong totalling $1,300 had been posted to her personal account in the accounts receivable ledger and the sales account as $3,100. (iii) Bank charges of $150 were included in the bank statement for December No entry had been made in the books. (iv) Rental income represented the amount received for sub-letting part of the office premises for 13 months from 1 January 2011 to 31 January (v) An insurance premium of $2,190 was prepaid for the three months ended 31 March Required: (a) Show the journal entries to correct the above errors. (Narrations are not required.) (b) Prepare a corrected trial balance as at 31 December (c) Prepare an income statement for the year ended 31 December Answer: (a) The (i) Purchases 1,500 Accounts payable 1,500 (ii) Sales ($3,100 $1,300) 1,800 Miss Fong 1,800 (iii) Bank charges 150 Bank 150 (iv) Rental income 335 Unearned revenue ($4,355 1/13) 335 (v) Prepaid expenses 2,190 Insurance 2,190 13

14 (b) Dolce Enterprise Corrected Trial Balance as at 31 December 2011 Dr Cr Capital as at 1 January ,000 5% bank loan 150,000 Non-current assets 270,300 Purchases ($733,500 + $1,500) 735,000 Sales ($1,149,750 $1,800) 1,147,950 Inventory as at 1 January ,800 Loan interest 7,500 Accounts receivable ($181,900 $1,800) 180,100 Accounts payable ($164,200 + $1,500) 165,700 Bank ($123,350 $150) 123,200 Bad debts 1,800 Water and electricity 7,000 Carriage outwards 2,255 Rental income ($4,355 $335) 4,020 Returns outwards 7,950 Rent, rates and insurance ($201,000 $2,190) 198,810 Salaries and wages 148,050 General expenses 7,800 Bank charges 150 Prepaid expenses 2,190 Unearned revenue 335 1,775,955 1,775,955 (c) Dolce Enterprise Income Statement for the year ended 31 December 2011 $ Opening inventory 91,800 Sales 1,147,950 Purchases 735,000 Less Returns outwards (7,950) 727, ,850 Less Closing inventory (90,855) Cost of goods sold 727,995 Gross profit c/d 419,955 1,147,950 1,147,950 Loan interest 7,500 Gross profit b/d 419,955 Bad debts 1,800 Rental income 4,020 Water and electricity 7,000 Carriage outwards 2,255 Rent, rates and insurance 198,810 Salaries and wages 148,050 General expenses 7,800 Bank charges 150 Net profit 50, , ,975 14

15 5. The balance sheet of Watt Enterprise as at 31 March 2010 is set out below: Balance Sheet as at 31 March 2010 Non-current assets Capital Plant and machinery 120,000 Balance as at 1 April ,000 Less Accumulated Add Net profit for the year 43,500 depreciation (30,000 ) 90, ,500 Motor vehicles 112,500 Less Drawings (11,190 ) Less Accumulated 167,310 depreciation (52,500 ) 60,000 Current liabilities 150,000 Accounts payable 5,010 Current assets Accrued expenses 180 5,190 Inventory 12,300 Accounts receivable 6,225 Bank 3,975 22, , ,500 After investigation, the following information was revealed: (i) During the inventory taking on 31 March 2010, 375 units of goods were entered at a unit cost of $1.8. Those goods should have been valued at $10.8 per unit. (ii) An allowance for doubtful accounts at 8% of accounts receivable was to be created. In addition, an allowance for discounts allowed of 2% was to be made. (iii) It is the firm s policy to depreciate non-current assets based on the reducing-balance method. Unfortunately, the accounts clerk wrongly computed the depreciation for the year (plant and machinery for $12,000 and motor vehicles for $22,500) based on the straight-line method even though the same rates had been applied. There was no purchase or disposal of non-current assets during the year. (iv) The accrued expenses of $180 should have been prepaid expenses. (v) The firm had $11,250 in wages and salaries outstanding as at 31 March 2010 but this had not been recorded. Required: (a) Prepare the journal entries to correct the above errors. (Narrations are not required.) (b) Calculate the net profit after adjustments have been made. (c) Prepare a statement to ascertain the amount of net current assets as at 31 March (Calculations to the nearest dollar) (W1) Plant and machinery: Answer: (a) Depreciation rate = Depreciation The overstated = $12,000 $10,200 = $1,800 (W2) Motor vehicles: (i) Inventory [375 ($10.8 $1.8)] 3,375 $22,500 Profit and loss Closing inventory Depreciation rate = 100% = 20% 3,375 $112,500 (ii) Profit and loss 613 Allowance for doubtful accounts ($6,225 Under the 8%) reducing-balance method, the depreciation charge for the year 498 Allowance for discounts allowed [($6,225 = [$112,500 $498) ($52,500 2%] $22,500)] 20% = $16, (iii) Accumulated depreciation: Plant and machinery Depreciation overstated = $22,500 $16,500 = $6,000 1,800 Profit and loss Depreciation (W1) 1,800 Accumulated depreciation: Motor vehicles 6,000 Profit and loss Depreciation (W2) 6,000 (iv) Accrued expenses 180 Prepaid expenses 180 Profit and loss expenses 360 (v) Profit and loss Wages and salaries 11,250 Accrued expenses 11, $12,000 $120, % = 10% Under the reducing-balance method, the depreciation charge for the year = [$120,000 ($30,000 $12,000)] 10% = $10,200

16 (b) Watt Enterprise Statement of Adjusted Net Profit for the year ended 31 March 2010 Net profit before adjustments 43,500 Add Closing inventory understated (i) 3,375 Depreciation on plant and machinery overstated (iii) 1,800 Depreciation on motor vehicles overstated (iii) 6,000 Prepaid expenses wrongly recorded as accrued expenses (iv) ,535 Less Allowance for doubtful accounts omitted (ii) 498 Allowance for discounts allowed omitted (ii) ,035 Accrued expenses omitted (v) 11,250 (11,863) Adjusted net profit 43,172 (c) Current assets Watt Enterprise Statement of Adjusted Net Current Assets as at 31 March 2010 Inventory ($12,300 + $3,375) 15,675 Accounts receivable 6,225 Less Allowance for doubtful accounts (498) Allowance for discounts allowed (115) 5,612 Prepaid expenses 180 Bank 3,975 Less Current liabilities Accounts payable 5,010 25,442 Accrued expenses 11,250 (16,260) Adjusted net current assets 9,182 16

17 6. The petty cashier of Hush Enterprise found that the petty cash balance shown in the petty cash book as at 30 April 2011 was different from the amount kept in the cash box. The balances were as follows: Balance as per petty cash book $1,250 Petty cash balance in the cash box $3,080 The monthly total of the expenses paid by petty cash had already been posted to the general ledger. After investigation, the petty cashier found the following mistakes: (i) A payment for cleaning expenses of $450 had been recorded twice in the petty cash book. (ii) Travelling expenses of $55 had been recorded in the petty cash book as $25. (iii) A medical claim by a staff member for $400 had been recorded in the motor expenses column. (iv) A magazine subscription of $1,000 had been paid by cheque. The petty cashier wrongly recorded it in the petty cash book. (v) A petty cash application to purchase stationery costing $710 was not paid by the petty cashier until 1 May However, it had been recorded in the petty cash book. (vi) During the month, the petty cashier reimbursed a staff member $330 for postage, which was actually $30. The amount recorded in the petty cash book was $30. As at 30 April 2011, the staff member had not returned the overpayment. Required: (a) Prepare the journal entries to correct the above errors. (Narrations are not required.) (b) Prepare a statement to show the correct petty cash book balance. (c) Prepare a statement to show the correct petty cash on hand balance, starting with the corrected petty cash book balance computed in part (b). Answer: (a) The (i) Petty cash 450 Cleaning expenses 450 (ii) Travelling expenses ($55 $25) 30 Petty cash 30 (iii) Medical expenses 400 Motor expenses 400 (iv) Petty cash 1,000 Bank 1,000 (v) Petty cash 710 Stationery expenses 710 (b) Statement Showing the Correct Petty Cash Book Balance as at 30 April Balance as per petty cash book before correction 1,250 Add Cleaning expenses recorded twice (i) 450 Less Magazine subscription wrongly recorded (iv) 1,000 Stationery expense not yet incurred (v) 710 2,160 Travelling expenses understated (ii) Correct petty cash book balance 3,380 (c) Statement Showing the Correct Petty Cash On Hand Balance as at 30 April 2011 Correct petty cash book balance 3,380 Less Over-payment of postage (vi) ($330 $30) (300) Correct petty cash on hand balance 3,080 3,410 (30) $

18 3. The following trial balance was extracted from Dolce Enterprise s books as at 31 December 2011: Dr Cr Capital as at 1 January ,000 5% bank loan 150,000 Non-current assets 270,300 Purchases 733,500 Sales 1,149,750 18

19 Inventory as at 1 January ,800 Loan interest 7,500 Accounts receivable 181,900 Accounts payable 164,200 Bank 123,350 Bad debts 1,800 Water and electricity 7,000 Carriage outwards 2,255 Rental income 4,355 Returns outwards 7,950 Rent, rates and insurance 201,000 Salaries and wages 148,050 General expenses 7,800 1,776,255 1,776,255 Inventory as at 31 December 2011 was valued at $90,855. After the preparation of the trial balance, the following errors were discovered: (i) A credit purchase of $1,500 had been completely omitted. (ii) A credit sale of goods to Miss Fong totalling $1,300 had been posted to her personal account in the accounts receivable ledger and the sales account as $3,100. (iii) Bank charges of $150 were included in the bank statement for December No entry had been made in the books. (iv) Rental income of $4,355 represented the amount received for sub-letting part of the office premises for 13 months from 1 January 2011 to 31 January (v) An insurance premium of $2,190 was prepaid for the three months ended 31 March Required: (d) Show the journal entries to correct the above errors. (Narrations are not required.) (e) Prepare a corrected trial balance as at 31 December (f) Prepare an income statement for the year ended 31 December (i) Purchases 1,500 Accounts payable 1,500 (ii) Sales ($3,100 $1,300) 1,800 Miss Fong 1,800 (iii) Bank charges 150 Bank 150 (iv) Rental income ($4,355 x 1/13) 335 Unearned revenue 335 (v) Prepaid expenses 2,190 Insurance 2, For each of the independent situations described below, prepare the journal entries to show the necessary adjustment. Narrations are not required. (i) A telephone bill for $632 had been paid through the bank using direct debit. The business made the following entries after a bank statement was received at the end of the month. Dr Telephone expenses $623 Cr Bank $ Discounts allowed are only for cash discount not the trade discount. So no need to enter the discount allowed

20 (ii) Credit sales of $250 to Kammy Luk, a customer, had been recorded in the purchases journal and then posted to the accounts payable ledger. (iii) The business decided to increase the allowance for doubtful accounts from $1,366 to $2,134. (iv) Depreciation at a rate of 5% on cost should be made on office equipment. The cost of the office equipment was $125,000. (v) The following entries were made to record this: Dr Accumulated depreciation: Office equipment $6,250 Cr Depreciation: Office equipment $6,250 A gross credit sale of $50,000 with a 5% trade discount was made and the following entries were made: Dr Accounts receivable $47,500 Dr Discounts allowed $2,500 Cr Sales $50,000 (vi) During the year, furniture which originally cost $74,220 and for which no depreciation had been was sold for $33,990 and the sum was paid by cheque. The bookkeeper debited the bank account and credited the sales account. (i) Telephone expenses ($632 $623) 9 Bank 9 (ii) Accounts payable Kammy Luk 250 Purchases 250 Accounts receivable Kammy Luk 250 Sales 250 (iii) Profit and loss Increase in allowance for doubtful accounts ($2,134 $1,366) 768 Allowance for doubtful accounts 768 (iv) Depreciation: Office equipment ($6,250 x 2) 12,500 Accumulated depreciation: Office equipment 12,500 (v) Sales ($50,000 $47,500) 2,500 Discounts allowed 2,500 (vi) Sales 33,990 Disposal: Furniture 33,990 Disposal: Furniture 74,220 Furniture 74,220 Profit and loss Loss on disposal 40,230 Disposal: Furniture 40,230 Look back to Disposal of non-current assets 20

21 The balance sheet of Watt Enterprise as at 31 March 2010 is set out below: Balance Sheet as at 31 March 2010 Non-current assets Capital Plant and machinery 120,000 Balance as at 1 April ,000 Less Accumulated Add Net profit for the year 43,500 depreciation (30,000 ) 90, ,500 Motor vehicles 112,500 Less Drawings (11,190) )Less Accumulated 167,310 depreciation (52,500 ) 60,000 Current liabilities 150,000 Accounts payable 5,010 Current assets Accrued expenses 180 5,190 Inventory 12,300 Accounts receivable 6,225 Bank 3,975 22, , ,500 After investigation, the following information was revealed: (vi) During the inventory taking on 31 March 2010, 375 units of goods were entered at a unit cost of $1.8. Those goods should have been valued at $10.8 per unit. (vii) An allowance for doubtful accounts at 8% of accounts receivable was to be created. In addition, an allowance for discounts allowed of 2% was to be made. (viii) It is the firm s policy to depreciate non-current assets based on the reducing-balance method. Unfortunately, the accounts clerk wrongly computed the depreciation for the year (plant and machinery for $12,000 and motor vehicles for $22,500) based on the straight-line method even though the same rates had been applied. There was no purchase or disposal of non-current assets during the year. (ix) The accrued expenses of $180 should have been prepaid expenses. (x) The firm had $11,250 in wages and salaries outstanding as at 31 March 2010 but this had not been recorded. Required: (a) Prepare the journal entries to correct the above errors. (Narrations are not required.) 21

22 (b) Calculate the net profit after adjustments have been made. (c) Prepare a statement to ascertain the amount of net current assets as at 31 March (Calculations to the nearest dollar) (i) Inventory [375 ($10.8 $1.8)] 3,375 Profit and loss Closing inventory 3,375 (ii) Profit and loss 613 Allowance for doubtful accounts ($6,225 8%) 498 Allowance for discounts allowed [($6,225 $498) 2%] 115 (iii) Accumulated depreciation: Plant and machinery (W1) 1,800 Profit and loss Depreciation 1,800 Accumulated depreciation: Motor vehicles (W2) 6,000 Profit and loss Depreciation 6,000 (iv) Accrued expense 180 Prepaid expense 180 Profit and loss 360 (v) Profit and loss 11,250 Accrued expenses 11,250 (W1) Plant and machinery: Depreciation rate = $12,000 $120, % = 10% Under the reducing-balance method, the depreciation charge for the year = [$120,000 ($30,000 $12,000)] 10% = $10,200 Depreciation overstated = $12,000 $10,200 = $1,800 (W2) Motor vehicles: Depreciation rate = $22,500 $112, % = 20% Under the reducing-balance method, the depreciation charge for the year = [$112,500 ($52,500 $22,500)] 20% = $16,500 Depreciation overstated = $22,500 $16,500 = $6,000 22

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