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Chapter 22: Q17. (page 1312)

(Error Analysis and Correcting Entry) The reported net incomes for the first 2 years of Sandra Gustafson Products, Inc., were as follows: 2017, \(147,000; 2018, \)185,000. Early in 2019, the following errors were discovered.

1. Depreciation of equipment for 2017 was overstated \(17,000.

2. Depreciation of equipment for 2018 was understated \)38,500.

3. December 31, 2017, inventory was understated \(50,000.

4. December 31, 2018, inventory was overstated \)16,200.

Instructions

Prepare the correcting entry necessary when these errors are discovered. Assume that the books are closed. (Ignore income tax considerations.)

Short Answer

Expert verified

The adjustment to retained earnings will be $37,700, and journal entries will be retained earnings will be debited, and inventory and Accumulated depreciation will be credited.

Step by step solution

01

Calculation of Adjustment amount

Adjustmentamount=Overstatement2018Inventory-Overstatement2017depreciation+Understatement2018depreciation=16,200-17,000+38,500=$37,700

02

Journal Entry for the adjustment

Date

Particulars

Debit ($)

Credit ($)

Retained Earnings

37,700

Inventory

16,200

Accumulated Depreciation Equipment

21,500

(Being adjustment to retained earnings recorded)

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