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:
|Overstatement of ending inventory||$42,000||$51,000||$29,000|
|Understatement of accrued advertising expanse||6,600||12,000||7,200|
(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.
|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.
|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
|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|
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fromChapter 6 / Lesson 13
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.