Question

Below are three independent and unrelated errors. On December 31, 2017, Wolfe-Bache Corporation failed to accrue office supplies expense of $1,800. In January 2018, when it received the bill from its supplier, Wolfe-Bache made the following entry: Office supplies expense 1,800 Cash 1,800 On the last day of 2017, Midwest Importers received a $90,000 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 $8,000 on a note receivable. At the beginning of 2018, when the company received the cash, it was recorded as interest revenue.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

Answer & Explanation

A)            Wolfe-Bache Corporation

Expenses will be understated thus, net income overstated.

In the balance sheet this makes assets Office supplies be overstated as it wasn't adjusted and retained earnings as well.

Prior Period Adjustment   1,800 debit

           Supplies                           1,800 credit

--to adjust supplies and recognize prior period results--

B)                Midwest Importers

rent revenue overstated thus, income statement overstated.

in the balance sheet Retained Earnings will be overstated as well.

While liabilities for the paid in advance rent will not exit thus, understated

Prior Period Adjustment   90,000 debit

           unearned revenue                 90,000 credit

--to adjust for unearned revenue on previous periods--

C)              Dinkins-Lowery Corporation

interest revenue will be understated thus, income statement as well.

In the balance sheet the note receivable net balance will be understated and so the equity as retained earnings is understated.

Prior period adjusment      8,000 debit

         interest receivable                  8,000 credit

--to adjust for missing year-end adjusting entry--