The current assets and current liabilities sections of the balance sheet of Allessandro Scarlatti Company appear as follows.

ALLESSANDRO SCARLATTI COMPANY
BALANCE SHEET PARTIAL
December 31, 2017
Cash		\(40,000	Account payable	\)61,000
Accounts receivables	\(89,000		Note payable	67,000
Less: Allowance for doubtful accounts	(7,000)	82,000		\)128,000
Inventory		171,000
Prepaid expenses		9,000
		\(302,000

The following errors in the corporation’s accounting have been discovered:

1. January 2018 cash disbursements entered as of December 2017 included payments of accounts payable in the amount of \)39,000, on which a cash discount of 2% was taken.

2. The inventory included \(27,000 of merchandise that had been received at December 31 but for which no purchase invoices had been received or entered. Of this amount, \)12,000 had been received on consignment; the remainder was purchased f.o.b. destination, terms 2/10, n/30.

3. Sales for the first four days in January 2018 in the amount of \(30,000 were entered in the sales journal as of December 31, 2017. Of these, \)21,500 were sales on account and the remainder were cash sales.

4. Cash, not including cash sales, collected in January 2018 and entered as of December 31, 2017, totaled \(35,324. Of this amount, \)23,324 was received on account after cash discounts of 2% had been deducted; the remainder represented the proceeds of a bank loan.

Instructions

(a) Restate the current assets and current liabilities sections of the balance sheet in accordance with good accounting practice. (Assume that both accounts receivable and accounts payable are recorded gross.)

(b) State the net effect of your adjustments on Allessandro Scarlatti Company’s retained earnings balance.

Step by step solution

01

Definition of Cash Discount

Cash discount can be defined as the advantages of making early cash payments. It is provided to motivate the borrower to make early payments.

02

Current Assets and Current Liability Section

Current Assets	Amount $	Current Liabilities	Amount $
Cash	$34,396	Account payable	$85,000
Inventory	159,000	Note payable	55,000
Accounts receivables	91,300
Less: Allowance	(7,000)
Prepaid expenses	9,000
Total	$286,696		$140,000

Working notes:

Calculation of adjusted cash balance

Particular	Amount $
Reported cash balance	$40,000
Add: Cash disbursement of 2018 after discount of 2% for $39,000	38,220
Less: Cash Sales of 2018	(8,500)
Less: Cash collected on account	(23,324)
Less: Proceed from bank loan	(12,000)
Adjusted Cash balance	$34,396

Calculation of adjusted inventory balance

Particular	Amount $
Reported inventory balance	$171,000
Less: Consignment inventory (35,324 – 23,324)	(12,000)
Adjusted Balance of inventory	$159,000

Calculation of adjusted balance of receivables

Particular	Amount $
Reported balance	$89,000
Less: Account sales of January 2018	(21,500)
Add: Collection in January 2018 (23,324/.98)	23,800
Adjusted balance	$91,300

Calculation of adjusted Balance of account payable

Particular	Amount $
Reported balance	$61,000
Add: Cash disbursement	39,000
Less: Purchase invoice omitted (27,000 – 12,000)	(15,000)
Adjusted balance of account payable	$85,000

Calculation of adjusted balance of note payable

Particular	Amount $
Reported balance	$67,000
Less: Proceed from bank loan	(12,000)
Adjusted balance of note payable	$55,000

03

Net Effect of Adjustment on Retained Earnings

Particular	Amount $
Sales discount of January (39,000/0.98)*0.02	$795.92
January sales	30,000
January Purchase discount (39,000*2%)	780
December Purchases (27,000 – 12,000)	15,000
Consignment inventory	12,000
Net decrease in the retained earnings	$58,575.92

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