Chapter 22: Accounting Errors

E22-15 (Error Correction Entries)

The first audit of the books of Bruce Gingrich Company was made for the year ended December
31, 2015. In examining the books, the auditor found that certain items had been overlooked or
incorrectly handled in the last 3 years.

These items are: 1. At the beginning of 2013, the company purchased a machine for $510,000
(salvage value of $51,000) that had a useful life of 6 years. The bookkeeper used straight-line
depreciation, but failed to deduct the salvage value in computing the depreciation base for the
3 years.

1. Accumulated Depreciation—Equipment ................ 25,500

Depreciation Expense ...................................... 8,500
Retained Earnings ............................................ 17,000

2013–2014 2015
Depreciation taken $170,000* $85,000
Less: Depreciation (correct) * 153,000 76,500
*$ 17,000 $ 8,500

*$510,000 X 1/6 X 2 years have passed (2013-2014) = $170,000

Depreciation correct: (510,000-51,000) / 6 yrs = $76,500 depreciation each year

2 years have passed: $76,500 x 2 = $153,000 for correct depreciation

2015 Depreciation: (510,000-51,000)- 153,000 depreciation for 2013-2014) / 3 yrs = $85,000

2. At the end of 2014, the company failed to accrue sales salaries of $45,000.

Retained Earnings .................................................................... 45,000

Salaries and Wages Expense ................................. 45,000
3. A tax lawsuit that involved the year 2013 was settled late in 2015. It was determined that the
company owed an additional $85,000 in taxes related to 2013. The company did not record a
liability in 2013 or 2014 because the possibility of loss was considered remote, and charged the
$85,000 to a loss account in 2015.

No entry necessary due to the loss was remote for the company.

4. Gingrich Company purchased a copyright from another company early in 2013

for $45,000. Gingrich had not amortized the copyright because its value had not
diminished. The copyright has a useful life at purchase of 20 years.

Amortization Expense ................................................... 2,250

Retained Earnings .................................................. 4,500
Copyrights....................................................... 6,750

($45,000 ÷ 20 = $2,250 per year) (($2,250 X 2 = $4,500)

5. In 2015, the company wrote off $87,000 of inventory considered to be

obsolete; this loss was charged directly to Retained Earnings. Instructions

Write off of Inventories .................................................. 87,000

Retained Earnings .......................................... 87,000

Prepare the journal entries necessary in 2015 to correct the books, assuming that the books
have not been closed. Disregard effects of corrections on income tax.
E22-16 (Error Analysis and Correcting Entry)

You have been engaged to review the financial statements of Gottschalk Corporation. In the
course of your examination, you conclude that the bookkeeper hired during the current year is
not doing a good job. You notice a number of irregularities as follows.

1. Year-end wages payable of $3,400 were not recorded because the bookkeeper thought
that “they were immaterial.”

Salaries and Wages Expense 3,400

Salaries and Wages Payable 3,400

2. Accrued vacation pay for the year of $31,100 was not recorded because the bookkeeper
“never heard that you had to do it.”

Salaries and Wages Expense 31,100

Salaries and Wages Payable 31,100

3. Insurance for a 12-month period purchased on November 1 of this year was charged to
insurance expense in the amount of $2,640 because “the amount of the check is about
the same every year.”

Prepaid Insurance ($2,640 X 10/12) 2,200

Insurance Expense 2,200

4. Reported sales revenue for the year is $2,120,000. This includes all sales taxes collected
for the year. The sales tax rate is 6%. Because the sales tax is forwarded to the state’s
Department of Revenue, the Sales Tax Expense account is debited. The bookkeeper
thought that “the sales tax is a selling expense.” At the end of the current year, the
balance in the Sales Tax Expense account is $103,400.

Sales Revenue 120,000

[$2,120,000 ÷ (1.00 + .06)] X 6%

Sales Taxes Payable 120,000

Sales Taxes Payable 103,400

Sales Tax Expense 103,400

E22-18 (Error Analysis) Peter Henning Tool Company’s December 31 year-end financial
statements contained the following errors.

December 31, 2014 December 31, 2015

Ending Inventory $9,600 understated $8,100 overstated

Depreciation Expense $2,300 understated

An insurance premium of $66,000 was prepaid in 2014 covering the years 2014, 2015, and
2016. The entire amount was charged to expense in 2014.

In addition, on December 31, 2015, fully depreciated machinery was sold for $15,000 cash, but
the entry was not recorded until 2016.

There were no other errors during 2014 or 2015, and no corrections have been made for any of
the errors. (Ignore income tax considerations.)

A. Compute the total effect of the errors on 2015 net income.

Effect of errors on 2015 net income: $24,700 overstatement

Computations:
Effect on 2015 net income
over (under) statement
Understatement of 2014 ending inventory ($ 9,600
Overstatement of 2015 ending inventory 8,100
Expensing of insurance premium in 2014
($66,000 ÷ 3) 22,000
Failure to record sale of fully depreciated (
machine in 2015 (15,000)
Total effect of errors on net income (
(overstated) $24,700
(b) Compute the total effect of the errors on the amount of Henning’s working
capital at December 31, 2015

Working capital is the amount of a company's current assets minus the amount
of its current liabilities

Effect of errors on working capital: $28,900 understatement

Computations:

Effect on working capital over

(under) statement

Overstatement of 2015 ending inventory $( 8,100)

Expensing of insurance premium in 2014

(prepaid insurance)
(22,000)

Sale of fully depreciated machine

unrecorded
(15,000)

Total effect on working capital (understated) $(28,900)

(c) Compute the total effect of the errors on the balance of Henning’s retained
earnings at December 31, 2015.

Effect of errors on retained earnings: $26,600 understatement

Computations:
Effect on retained earnings
over (under) statement
Overstatement of 2015 ending inventory $( 8,100
Understatement of depreciation expense
in 2014 2,300
Expensing of insurance premium in 2014 (22,000)
Failure to record sale of fully depreciated
machine in 2015 (15,000)
Total effect on retained earnings
(understated) $(26,600)