Question

On December 12, 2018, an investment costing $87,000 was sold for $114,000. The total of the sale proceeds was credited to the investment account. Required: (1) Prepare the journal entry to correct the error assuming it is discovered before the books are adjusted or closed in 2018. (Ignore income taxes.) (2) Prepare the journal entry to correct the error assuming it is not discovered until early 2019. (Ignore income taxes.)

Answer 1

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.