Answer:
(1) Journal entry to correct the error assuming it is discovered before the books are adjusted or closed in 2018:
Dr Investment 27,000
Cr Gain on sales 27,000
(2) Journal entry to correct the error assuming it is not discovered until early 2019
Dr Investment 27,000
Cr Retained Earning 27,000
Explanation:
As the firm was credit on the sales proceed of $114,000 into investment account while it should be credited $87,000, the investment proceed is understated by $27,000 ( 87,000 - 114,000). So, under both (1) and (2) assumption, Investment needs to raise up ( Dr) by $27,000.
The $27,000 understated in the Investment should go into (Credit) Gain on sales account. Thus, Gain on Sales account is also understated by $27,000. With different assumption (1) and (2) given, we have:
- (1) As the year 2018 is not yet closed, Gain on sales account has not been transferred into Retained Earning account yet. Thus, we adjusted directly in the Gain on sales account.
- (2) As the year 2018 was already closed, Gain on sales account has been transferred into Retained Earning account. Thus, we adjusted the Retained Earning account.
