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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)
Journal Date Details Dr Cr 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 2010 $ 2010 $ May 31 P Lau – Error correction 500 May 18 Bank 500
P Lau
2010 $ 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 2010. Show the journal entries and ledger to correct it if the error was found on 31 May 2010. Narrations are not required.
Journal
Date Details Dr Cr
2010 $ $
May 31 H Lin 6,780
H Lui 6,780 Accounts Receivable Ledger
H Lui 2010 $ 2010 $
May 15 Sales 6,780 May 31 H Lin – Error correction 6,780
H Lin 2010 $
May 31 H Lui – Error correction 6,780 2. A medical claim by a staff member for $400 had been recorded in the motor expenses column.
Journal
Details Dr Cr
$ $
Medical expenses 400
Motor expenses 400
Name : _________________ Serial No: _____
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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)
Journal
Date Details Dr Cr
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
2010 $ 2010 $ May 14 Bank 55,000 May 31 Lorries – Error correction 55,000
Lorries
2010 $ 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 2010. Show the
journal entries and ledger to correct it if the error was found on 31 March 2010. Narrations are not required.
Journal
Date Details Dr Cr
2010 $ $
Mar 31 Vans 38,000
Motor expenses 38,000
General Ledger
Motor expenses
2010 $ 2010 $
Mar 10 Cash 38,000 Mar 31 Vans – Error correction 38,000
Vans
2010 $
May 31 Motor expenses – Error correction 38,000
2. A cheque of $1,890 for advertisement payment had been entered in the cash column of the cash book on 3 December 2010.
Show the journal entries to correct it if the error was found on 31 December 2010. Narrations are not required.
Journal
Date Details Dr Cr
2010 $ $
Dec 31 Cash 1,890
Bank 1,890
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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)
Journal
Date Details Dr Cr
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
2010 $ May 31 T Hui – Error correction 2,500
Accounts Payable Ledger
T Hui
2010 $ 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 2010.
Show the journal entries and ledger to correct it if the error was found on 31 March 2010. Narrations are not required.
Journal
Date Details Dr Cr
2010 $ $
Mar 31 Machinery 43,900
L Po 43,900
General Ledger
Machinery
2010 $
Mar 31 L Po – Error correction 43,900
Accounts Payable Ledger
L Po
2010 $
Mar 31 Machinery – Error correction 43,900 2. Accrued rental expenses of $5,210 were omitted from the books on 8 December 2010. Show the journal entries to correct it if
the error was found on 31 December 2010. Narrations are not required.
Journal
Date Details Dr Cr
2010 $ $
Dec 31 Rental expenses 5,210
Accrued rental expenses 5,210
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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) Journal
Date Details Dr Cr
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 2010 $ May 13 Sales 1,300 May 31 Sales – Error correction 200
General Ledger Sales
2010 $ 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 2010. Show the journal entries and ledger to correct it if the error was found on 31 March 2010. Narrations are not required.
Journal
Date Details Dr Cr
2010 $ $
Mar 31 C Fung ($2,210 $2,120) 90
Sales 90
Accounts Receivable Ledger
C Fung
2010 $
Mar 18 Sales 2,120
Mar 31 Sales – Error correction 90
General Ledger Sales
2010 $
May 18 C Fung 2,120
May 31 C Fung – Error correction 90 2. Purchases of $8,900 on credit from K Li had been entered in the purchases journal as $9,900 on 8 December 2010. Show the
journal entries to correct it if the error was found on 31 December 2010. Narrations are not required.
Journal
Date Details Dr Cr
2010 $ $
Dec 31 K Li ($9,900 $8,900) 1,000
Purchases 1,000
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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 2010. 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)
Journal Date Details Dr Cr
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 2010 $ 2010 $ May 31 Cash – Error correction 4,000 May 28 Cash 2,000
General Ledger Cash
2010 $ 2010 $ 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 2010. Show the journal entries and ledger to correct it if the error was found on 31 May 2010.
Journal
Date Details Dr Cr
2010 $ $
May 31 H Kwong 16,000
Cash 16,000
Accounts Payable Ledger
H Kwong
2010 $ 2010 $
May 31 Cash – Error correction 16,000 May 28 Cash 8,000
General Ledger Cash
2010 $ 2010 $
May 28 H Kwong 8,000 May 31 H Kwong – Error correction 16,000 2. Sales of $1,250 had been entered on the wrong side of the sales and debtor ’s account on 8 December 2010. Show the journal
entries to correct it if the error was found on 31 December 2010. Narrations are not required.
Journal
Date Details Dr Cr
2010 $ $
Dec 31 Debtor ($1,250 x 2) 2,500
Sales 2,500
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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 2010. 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) Journal
Date Details Dr Cr
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 2010 $ 2010 $ May 31 Total for the month 80,000 Jun 15 Sales – Error correction 1,000
Sales 2010 $ 2010 $ 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 2010.
Journal
Date Details Dr Cr
2010 $ $
May 31 Returns outwards 2,000
Returns inwards 2,000
General Ledger Returns outwards
2010 $ 2010 $
May 31 Returns inwards – Error correction 2,000 May 31 Total for the month 120,000
Returns inwards
2010 $ 2010 $
May 31 Total for the month 8,000 May 31 Returns outwards – Error correction 2,000
2. Both the rent revenue and motor expense had been undercast by $200 on 8 December 2010. Show the journal entries to
correct it if the error was found on 31 December 2010. Narrations are not required.
Journal
Date Details Dr Cr
2010 $ $
Dec 31 Motor expense 200
Rent revenue 200
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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) Journal
Date Details Dr Cr 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 55,000
6.8 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:
Journal Details Dr Cr
$ $ 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.
Journal
Details Dr Cr
$ $
Inventory 800
Profit and loss – Closing inventory 800
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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:
Journal Details Dr Cr
$ $ 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.
Journal Details Dr Cr
$ $
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:
Journal Details Dr Cr
$ $
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.
Journal
Details Dr Cr
$ $
Profit and loss – Increase in allowance for doubtful accounts ($4,200 $2,400) 1,800
Allowance for doubtful accounts 1,800
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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:
Journal Details Dr Cr
$ $ 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. Journal
Details Dr Cr
$ $
Profit and loss revenue/expense 1,000
Accrued revenue 500
Accrued expense 500
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Class work 11
1. 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 2012.
(ii) An insurance premium of $2,190 was prepaid for the three months ended 31 March 2012.
(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..
Journal
Details Dr Cr
$ $
(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
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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.
Journal
Details Dr Cr
$ $
(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
Bad debts 880
(vi) No journal entry is required
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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 2009 3,000 Inventory as at 31 December 2009 6,400 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 2009. (a)
Journal
Details Dr Cr
$ $
(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 2009
Dr Cr
$ $
Inventory as at 1 January 2009 3,000
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 (2500 + 100) 2,600
Accrued expenses 100
Capital 34,700
62,300 62,300
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4. The following trial balance was extracted from Dolce Enterprise’s books as at 31 December 2011:
Dr Cr
$ $
Capital as at 1 January 2011 300,000 5% bank loan 150,000 Non-current assets 270,300 Purchases 733,500 Sales 1,149,750 Inventory as at 1 January 2011 91,800 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 2011. 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 2012. (v) An insurance premium of $2,190 was prepaid for the three months ended 31 March 2012. 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 2011. (c) Prepare an income statement for the year ended 31 December 2011.
Answer:
(a)
The Journal
Details Dr Cr
$ $
(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
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(b)
Dolce Enterprise Corrected Trial Balance as at 31 December 2011
Dr Cr
$ $
Capital as at 1 January 2011 300,000
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 2011 91,800
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) 727,050
818,850
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 50,610
423,975 423,975
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 2009 135,000 Less Accumulated Add Net profit for the year 43,500
depreciation (30,000 ) 90,000 178,500
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
172,500 172,500
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 2010. (Calculations to the nearest dollar)
Answer:
(a)
The Journal
Details Dr Cr
$ $
(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 – $498) × 2%] 115
(iii) Accumulated depreciation: Plant and machinery 1,800
Profit and loss ─ Depreciation (W1) 1,800
Accumulated depreciation: Motor vehicles 6,000
Profit and loss ─ Depreciation (W2) 6,000
(iv) Accrued expenses 180
Prepaid expenses 180
Profit and loss ─ expenses 360
(v) Profit and loss ─ Wages and salaries 11,250
Accrued expenses 11,250
(W1) Plant and machinery:
Depreciation rate = 000,120$
000,12$ 100% = 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 = $1,800
(W2) Motor vehicles:
Depreciation rate = 500,112$
500,22$ 100% = 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
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) 360 11,535
55,035
Less Allowance for doubtful accounts omitted (ii) 498
Allowance for discounts allowed omitted (ii) 115
Accrued expenses omitted (v) 11,250 (11,863)
Adjusted net profit 43,172
(c)
Watt Enterprise
Statement of Adjusted Net Current Assets as at 31 March 2010
$ $
Current assets
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
25,442
Less Current liabilities
Accounts payable 5,010
Accrued expenses 11,250 (16,260)
Adjusted net current assets 9,182
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 2011. 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 Journal
Details Dr Cr
$ $
(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 2011
$ $
Balance as per petty cash book before correction 1,250
Add Cleaning expenses recorded twice (i) 450
Magazine subscription wrongly recorded (iv) 1,000
Stationery expense not yet incurred (v) 710 2,160
3,410
Less Travelling expenses understated (ii) (30)
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
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3. The following trial balance was extracted from Dolce Enterprise’s books as at 31 December 2011:
Dr Cr
$ $
Capital as at 1 January 2011 300,000 5% bank loan 150,000 Non-current assets 270,300 Purchases 733,500 Sales 1,149,750
19
Inventory as at 1 January 2011 91,800 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 2011. 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 2012.
(v) An insurance premium of $2,190 was prepaid for the three months ended 31 March 2012.
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 2011.
(f) Prepare an income statement for the year ended 31 December 2011.
Journal
Details Dr Cr
$ $
(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 2,190
3. 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 $623
Discounts allowed are only for cash discount not the
trade discount. So no need to enter the discount allowed
in this case. On the other hand, the amount for sales and
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.
The following entries were made to record this:
Dr Accumulated depreciation: Office equipment $6,250
Cr Depreciation: Office equipment $6,250
(v) 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.
Journal
Details Dr Cr
$ $
(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
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 2009 135,000 Less Accumulated Add Net profit for the year 43,500
depreciation (30,000 ) 90,000 178,500
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
172,500 172,500
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.)
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 2010.
(Calculations to the nearest dollar)
Journal
Details Dr Cr
$ $
(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 – $498) × 2%] 115
(iii) Accumulated depreciation: Plant and machinery (W1) 1,800
Profit and loss ─ Depreciation 1,800
Accumulated depreciation: Motor vehicles (W2) 6,000
Profit and loss ─ Depreciation 6,000
(iv) Accrued expense 180
Prepaid expense 180
Profit and loss 360
(v) Profit and loss 11,250
Accrued expenses 11,250
(W1) Plant and machinery: Depreciation rate = 000,120$
000,12$ 100% = 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 = $1,800
(W2) Motor vehicles: Depreciation rate = 500,112$
500,22$ 100% = 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
23