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Accounting.
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Appendix 2l A-Eror Analysri Il87
A =L' SE
1,400 0 1.400
Cash ilows: No eifeci
Bad Debt ExpenseRetained Earnings
Allowance for Doubtful Accounts
Allowance for doubtful accounts:Additional $300 for 2014 sales and $1,100 for 2015sales : $1,400.
Bad debt exp€nse corrections needed:
Accounts written off by year of sale ($550 + $690 = $1,240)Additional bad debts anticipated (total of $1,400)
Correct amount of bad debt expense each yea({g, )Bad debt expense previously recorded
Bad debt expense adjustment needed
Retained EarningsAllowance for Doubtful Accounts
410990
A)a">t*t,\ n,/,y)'
.)c I zL }DIE
2014
$ 1,240300
1,540(550)
$ 990
1,400
1,400
<xr >
2015
$ 7001,100
1,800(1,390)
$ 410
1,400
( (e:n.pt t ->
Ba-./ D<-l-/i,<^p
A [/'v'ona
'4lboan <P
^/N/ .Ttttotvett )
{*e) l{}>i,t-4D t,8oe/t4-lD /ttao
tfo i)7a56b /')7o
tal bc-lt.e"p $a
^/A frb
A =L* S[1,400 0 1,400
cash fiows: No effect
1{t)' r tua + /,900 * 1-1-b * /,)7D - i,kbA/' J'/o lt $e books hare bein closed for 2015. Lhe enrry is:
/,)? a
1050450
1,500
tr@nltCoftecting Enties with lncome
Tox Effects
Income Tax Effectsfu mentioned earlier, the income ta-r effects are not reported with the above correctingentries in order to make it easier for you to focus on the effects of the errors themselves.Once you understand the correcting entries, it is easier to add the income tax effects, as wewill do now.
If a correction increases a previous year's income (either by an increase in revenueor a decrease in expense), the income ta-r expense for that period will usually be increased:more income, more tax. Ifthe correction reduces a previous year's income (either by a
decrease in revenue or an increase in expense), the income tax expense for that period willusually be reduced: less income, less tax. The net correction to retained earnings, there-fore, is made net oftax. Note that for counterbalancing errors, the income tax effects alsooffset each other over the two-year period, assuming tax rates have not changed.
Because the tax return for the previous period has already bcen filed, most adjust-ments of the previous year's income affects Income Jlx Payable. The Deferred Ta-x Asset/Liability account is affected only when the treatment for income taxes in the previous yearis a permitted tax treatment. Examples include the depreciation and bad debt non-coun-terbalancing error situations below. In both these cases, taxable income was correcr as itwas calculated in the prior year, but now the amount of the related temporary differencehas changed.
Illustration 214-l identifies the correcting entries that are needed, including the taxeffects for the counterbalancing and non-counterbalancing examples we just walkedthrough. A 30% income tax rate is assumed for all years.
Not Closed
COUNTERBALANCING ERRORS
l. Accrued Wages
Retained Earningslncome Tax Payable
Salaries and Wages
Expense
Closed
No Entry