Vance Company reported incomes for a three-year period as follows: 2011, $191,000; 2012,...

Question:

Vance Company reported incomes for a three-year period as follows:

2011, $191,000; 2012, $199,000; 2013, $180,000.

In reviewing the accounts in 2014 after the books for the prior year have been closed, you find that the following errors have been made in summarizing activities:

2011 2012 2013
Overstatement of ending inventory $42,000 $51,000 $29,000
Understatement of accrued advertising expanse 6,600 12,000 7,200

Instructions:

(a) Fill out the worksheet below to determine corrected net incomes for 2011, 2012, and 2013. Be sure to use parentheses to indicate subtraction or decreasing amounts.

Item 2011 2012 2013
Net income (unadjusted) $191,00 $199,000 $180,000
Overstatement of ending inventory - 2011
Overstatement of ending inventory - 2012
Overstatement of ending inventory - 2013
Understatement of accrued advertising expense - 2011
Understatement of accrued advertising expense - 2012
Understatement of accrued advertising expense - 2013
Net Income (corrected) $ $ $

(b) Give the entry to bring books of the company up to date in 2014, assuming that the books have been closed for 2013.

Correcting Accounting Errors

Accounting errors that are discovered after the books for a period have been closed and the financial statement published must be corrected in the current period by restating the opening balances.

Answer and Explanation: 1


(a) Remember that the overstatement of ending inventory means that the cost of goods sold expense was understated, and the net income therefore overstated.

Item 2011 2012 2013
Net income (unadjusted) $191,000 $199,000 $180,000 $570,000
Overstatement of ending inventory - 2011 (42,000) 42,000 0 0
Overstatement of ending inventory - 2012 (51,000) 51,000 0
Overstatement of ending inventory - 2013 (29,000) (29,000)
Understatement of accrued advertising expense - 2011 (6,600) 6,600 0
Understatement of accrued advertising expense - 2012 (12,000) 12,000 0
Understatement of accrued advertising expense - 2013 (7,200) (7,200)
Net Income (corrected) $142,400 $184,600 $206,800 $533,800


(b) The error must adjust the ending inventory and accrued advertising expense balances and correct the operating balance of Retained Earnings

Date Description Debit Credit
Jan 1 2014 DR Retained Earnings = $570,000 - $533,800 $36,200
CR Inventory asset $29,000
CR Accrued Advertising Expense $7,200
To correct errors in the opening balances

Learn more about this topic:

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The Effects of Inventory Errors

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Chapter 6 / Lesson 13
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For companies, a miscount of inventory can be a serious issue. In this lesson we'll look at the effects of inventory errors on companies, both with respect to profits and how the error should be recorded.


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