MASTERING CORRECTION OF ACCOUNTING ERRORS
SOLUTIONS TO HOMEWORK EXERCISES
Section 1–WHERE ERRORS OCCUR AND HOW THEY ARE FOUND
1. Match the following errors on the left with the type of error on the right.
_h_ 1. A cash sale for $700 was recorded as $7,000.
_f_ 2. Annual depreciation was calculated using a
useful life of 8 years instead of 6 years.
_ a _ 3. A purchase of supplies was never booked.
_ g _ 4. A $740 customer check was recorded as $470.
_ c _ 5. Payment for an ad was debited to Utilities
Expense.
_ a _ 6. At year end, no adjusting entry was recorded for
annual depreciation expense.
_ b _ 7. On March 1, a $1,200 check to pay the premium
for a 24-month policy was debited to Prepaid
Insurance. On December 31, the adjusting entry
recognized insurance expense of $450.
a. Omission
b. Accrual or deferral error
c. Classification error
d. Arithmetic mistake
e. Use of incorrect
accounting principle
f. Use of improper
accounting estimate
g. Transposition error
h. Slide error
i. Posting error
2. Match the following errors on the left with the type of error on the right.
_ h _ 1. A $7,000 equipment purchase booked at $700.
a. Omission
_ c _ 2. A $1,000 equipment purchase debited to
Supplies.
b. Accrual or deferral error
_ d _ 3. Four cash accounts with balances of $1,000,
$4,200, $3,100 and $1,800 are totaled and
entered as $10,000.
_ f _ 4. GrowCo, which normally takes 2% of accounts
receivable as bad debt, takes 3% this year.
_ b _ 5. On Oct. 1, a firm receives $1,200 for 12 months’
rent and credits Rent Revenue. The year-end
adjusting entry debits Rent Revenue and
credits Rent Received In Advance for $300.
Homework Solutions
c. Classification error
d. Arithmetic mistake
e. Use of incorrect accounting
principle
f. Use of improper
accounting estimate
g. Transposition error
h. Slide error
i. Posting error
1
Mastering Correction of Accounting Errors
Section 2THE BANK RECONCILIATION
1. Indicate for each of the following whether you must adjust the bank balance (“Bank”) or
ledger Cash account (“Ledger Cash”) in your monthly reconciliation.
a. A debit memo
Book
b. A deposit in transit
Bank
c. A bank service charge
Book
d. A credit memo
Book
e. An NSF check
Book
f.
An outstanding check
Bank
g. Unrecorded interest
Book
h. Collection by the bank of a note receivable from a customer with accrued interest
Book
Homework Solutions
2
Mastering Correction of Accounting Errors
2. Below are items for October 200X that you are seeing for the first time.
a. Indicate with a check mark whether each item should be added to or subtracted from the
bank balance, book balance, or neither (i.e., it does not affect the bank reconciliation).
Bank balance
Add
Deduct
a.
b.
c.
Book balance
Add
Deduct
Not
used
X
Interest earned on bank cash balance
Bank service charge
NSF check from a customer
X
X
d.
e.
f.
g.
h.
i.
A night deposit made on October 31
when the bank was closed
Checks written and mailed October 31
An October 12 deposit appearing on the
bank statement as made on October 13
Another company’s check charged to our
account
Payment of a phone bill that appears on
the bank statement but was never
recorded
Collection of principal and interest on a
customer’s note collected by the bank
X
X
X
X
X
X
b. Prepare the journal entries to conform the ledger Cash account balance with the
reconciled bank balance as of October 31.
a.
Cash
XXX
b.
Miscellaneous Expense
Cash
To record bank service charge
XXX
c.
Accounts Receivable
Cash
To record NSF check returned by bank
XXX
h.
Utilities Expense
Cash
To record utility expense
XXX
i
Cash
XXX
Interest Income
To record bank interest
Note Receivable
Interest Income
To record N/R and interest collected by bank
Homework Solutions
XXX
XXX
XXX
XXX
XXX
XXX
3
Mastering Correction of Accounting Errors
3. Fiori publishes ratings and reviews of hotels and restaurants for traveling salespeople.
As of June 31, Fiori’s ledger Cash balance is $31,466. The June bank statement balance
is $70,616, and includes the following items.






Bank service charge for June, $50
NSF check returned with June bank statement, $2,300
Note collected for your company by the bank in June, $25,000
Interest on note collected by the bank in June, $2,500
Outstanding checks as of the end of June, $21,000
Deposit in transit at the end of June, $7,000
a. Prepare Fiori’s June bank reconciliation.
Fiori International Bank Reconciliation for June 30
Balance per bank, June 30
Deduct: Outstanding checks
Corrected cash balance, June 30
$ 70,616
7,000
$ 77,616
21,000
$ 56,616
Balance per books, June 30
$ 31,466
Deduct: NSF check
Bank service charge
Corrected cash balance, June 30
$ 56,616
Add:
Add:
June 30 deposit in transit
Note receivable collected by bank
Interest collected by bank on note receivable
25,000
2,500
$ 58,966
2,300
50
b. Prepare the journal entries to conform Fiori’s ledger Cash account balance
with the reconciled bank balance as of June 30.
Cash
25,000
Notes Receivable
To record collection of N/R by bank
25,000
Cash
2,500
Interest Income
To record interest on note N/R by bank
2,500
Accounts Receivable
2,300
Cash
2,300
To record NSF check returned by the bank
Miscellaneous Expense
Cash
To record bank service charge
Homework Solutions
50
50
4
Mastering Correction of Accounting Errors
4. On July 31, Reed Co’s ledger Cash account balance is $25,110, its bank statement
balance, $27,620. Use the data below to reconcile the two balances as of July 31, 20X9:






Checks outstanding of $6,300
Check #244, to pay the June gas bill was correctly written for $270, but recorded on
Reed’s books as $720
$60 for a safe-deposit box—but Reed does not rent one
A debit memorandum for $200 for a $175 NSF check and $25 bank NSF fee.
A $40 debit memorandum for bank service Reed is seeing for the first time
A July 31 night deposit of that day’s cash receipts of $3,940 that is not on the bank
statement
a. Prepare Reed Co’s bank reconciliation for July 31, 20X9.
Reed Co. Bank Reconciliation for July 31
Balance per bank statement, July 31
Add:
$ 27,620
July 31 deposit in transit
Erroneous safe deposit box charge
Deduct: Outstanding checks
Corrected cash balance, July 31
3,940
60
$ 31,620
6,300
$ 25,320
Balance per books, July 31
$ 25,110
Add:
Error in recording check No. 244
Deduct:
NSF check
NSF fee
Bank service charge
450
$ 25,560
175
25
40
Corrected cash balance, July 31
$ 25,320
b. Prepare the journal entries required to conform the company’s book balance
with the reconciled bank balance as of July 31, 20X9.
Cash
450
Utilities Expense
To correct utilities expense book error
450
Accounts Receivable
175
Miscellaneous Expense
25
Cash
To record NSF check and service charge
200
Miscellaneous Expense
Cash
To record bank service charge
Homework Solutions
40
40
5
Mastering Correction of Accounting Errors
5. Below is Dekin Company’s September check register and September 30 bank statement.
Use the information to prepare Dekin’s September bank reconciliation and adjusting
journal entries.
Date
1-Sep
1-Sep
1-Sep
2-Sep
2-Sep
4-Sep
4-Sep
5-Sep
7-Sep
8-Sep
8-Sep
9-Sep
11-Sep
12-Sep
12-Sep
13-Sep
14-Sep
20-Sep
22-Sep
27-Sep
30-Sep
Party
Ref #
Check
Deposit
$12,505.35
Zambrano
Theriot
Cedeno
Soto
446
447
448
449
$2,908.09
466.78
2,462.99
387.97
Fontenot
Ramirez
Lee
Soriano
Derosa
Edmonds
Dempster
Soto
450
451
452
453
454
455
456
457
1,404.67
3,145.87
1,143.23
9,290.44
3,100.33
387.22
955.77
4,788.78
13,400.00
6,855.91
Zambrano
Blanco
Johnson
Ramirez
Homework Solutions
458
460
461
462
6,364.34
1,677.21
985.22
1,466.35
12,235.66
Balance
$17,489.00
29,994.35
27,086.26
26,619.48
24,156.49
23,768.52
37,168.52
35,763.85
32,617.98
31,474.75
22,184.31
19,083.98
18,696.76
17,740.99
12,952.21
19,808.12
13,443.78
11,766.57
10,781.35
9,315.00
21,550.66
6
Mastering Correction of Accounting Errors
The Friendly Bank
THIS STATEMENT COVERS:
9/1/20X9 TO 9/30/20X9
STATEMENT FOR:
Dekin Company
123 Bluffs Rd
Anytown, UT 84098
MONTHLY SUMMARY
CHECKING
ACCOUNT #
434257
Previous statement balance on 8/31/20X9
+ Total of 4 deposits for
- Total of 14 withdrawals for
+ Interest earnings for
- Service charges for
= New balance
CHECK
CHECKS
AND OTHER
DEBITS
$17,489.00
42,535.89
37,535.27
45.27
35.00
$22,499.89
DATE AMOUNT
CHECK
PAID
446
3-Sep
$2,908.09
454
448*
5-Sep
2,462.99
456*
449
7-Sep
387.97
457
450
7-Sep
1,404.67
458
452*
10-Sep
1,143.23
459
453
11-Sep
9,290.44
460
Electronic funds transfer – Regions GasCo-op
NSF returned check - maker BNC Services
NSF fee
Monthly service fee
DATE
PAID
12-Sep
13-Sep
14-Sep
18-Sep
20-Sep
21-Sep
25-Sep
28-Sep
28-Sep
31-Sep
AMOUNT
Customer deposit
Customer deposit
Collection-Note receivable ($9,500 + interest)
Customer deposit
Interest earnings
DATE
1-Sep
5-Sep
11-Sep
14-Sep
31-Sep
AMOUNT
$12,505.35
13,400.00
9,774.63
6,855.91
45.27
DEPOSITS
AND OTHER
CREDITS
Homework Solutions
$3,100.33
955.77
4,788.78
6,364.34
45.54
1,677.21
1,237.34
1,768.57
25.00
10.00
7
Mastering Correction of Accounting Errors
Dekin Company Bank Reconciliation for September 30
Balance per bank statement, September 30
Add:
$ 22,499.89
September 30, deposit in transit
12,235.66
$ 34,735.55
6,451.44
$ 28,284.11
Deduct: Outstanding checks
Corrected cash balance, September 30
Balance per books, September 30
Add:
Note receivable collected by bank
Interest earned on note receivable
Interest earned on average daily balance
Deduct:
NSF check
NSF fee
Check 459 not recorded
Electronic funds transfer (Gas Co.)
Bank service charge
Corrected cash balance, September 30
Cash
9,774.63
Notes Receivable
Interest Income
To correct N/R and interest collected by bank
9,500.00
274.63
45.27
$ 31,370.56
1,768.57
25.00
45.54
1,237.34
10.00
$ 28,284.11
9,500.00
224.63
Cash
45.27
Interest Income
To correct interest earned on cash balance
45.27
Accounts Receivable
1768.57
Miscellaneous Expense
25.00
Cash
To record NSF check and service charge
1,793.57
Unknown*
45.54
Cash
To record Check 459 not previously recorded
$ 21,550.66
45.54
* There is no way to know which account to debit. It could be A/P, an expense or
other account.
Utilities Expense
Cash
To record bank service charge
1,237.34
Miscellaneous Expense
Cash
To record bank service charge
10.00
Homework Solutions
1,237.34
10.00
8
Mastering Correction of Accounting Errors
Section 3–FINDING AND CORRECTING ERRORS USING THE UNADJUSTED TRIAL BALANCE
1.
In the trial balance below, total debits do not equal total credits. Find and
correct the likely error(s) to bring the totals into balance.
Debit
Credit
Cash
410
Accounts Receivable
740
Supplies on Hand
1,850
Prepaid Insurance
6,500
Equipment
154,000
Accounts Payable
23,000
Long-term Notes Payable
30,000
W. Worthington, Capital
46,260
Constuction Revenues
112,000
Wage Expense
29,400
Interest Expense
900
Rent Expense
10,800
Totals
204,600
211,260
When you scan the accounts, all appear to have normal balances. But there is a
difference between total debits and credits of $6,660. When we divided this by 2, we get
$3,330. Yet there is no account balance for this amount. When we divide $6,660 by 9, we
get $740. Scanning the columns, we see that Accounts Receivable has a balance of $740,
so this is a slide error. The correct Accounts Receivable balance is $7,400. When we
make the correction, the trial balance appears as follows:
Cash
Accounts Receivable
Supplies on Hand
Prepaid Insurance
Equipment
Accounts Payable
Long-term Notes Payable
W. Worthington, Capital
Constuction Revenues
Wage Expense
Interest Expense
Rent Expense
Totals
Homework Solutions
Debit
410
7,400
1,850
6,500
154,000
29,400
900
10,800
211,260
Credit
23,000
30,000
46,260
112,000
211,260
9
Mastering Correction of Accounting Errors
2. In the trial balance below, total debits do not equal total credits. Find and correct the
likely error(s) that bring the totals into balance.
Cash
Accounts Receivable
Allowance for Doubtful Accounts
Supplies on Hand
Prepaid Insurance
Equipment
Accum. Depreciation  Equipment
Accounts Payable
Long-term Notes Payable
J. Smith, Capital
Consulting Revenues
Wage Expense
Interest Expense
Rent Expense
Repairs Expense
Utilities Expense
Totals
Debit
22,500
30,000
2,000
1,850
6,500
144,000
48,500
Credit
3,000
50,000
57,300
102,000
39,400
900
10,800
100
6,750
313,300
212,300
Eyeballing the accounts for normal balances, we see that Allowance for Doubtful
Accounts and Accumulated Depreciation, both contra asset accounts, are in the debit
column. But both of these accounts have a normal credit balance. When we move these
two balances into the credit column and recompute, total debits equal total credits.
Cash
Accounts Receivable
Allowance for Doubtful Accounts
Supplies on Hand
Prepaid Insurance
Equipment
Accum. Depreciation  Equipment
Accounts Payable
Long-term Notes Payable
J. Smith, Capital
Consulting Revenues
Wage Expense
Interest Expense
Rent Expense
Repairs Expense
Utilities Expense
Totals
Homework Solutions
Debit
22,500
30,000
1,850
6,500
144,000
39,400
900
10,800
100
6,750
262,800
Credit
2,000
48,500
3,000
50,000
57,300
102,000
262,800
10
Mastering Correction of Accounting Errors
3. In the trial balance below, total debits do not equal total credits. Find and correct the
likely error(s) that bring the totals into balance.
Cash
Accounts Receivable
Allowance for Doubtful Accounts
Supplies on Hand
Prepaid Insurance
Equipment
Accum. Depreciation  Equipment
Accounts Payable
Long-term Notes Payable
S. Jones, Capital
Consulting Revenues
Wage Expense
Interest Expense
Rent Expense
Repairs Expense
Utilities Expense
Totals
Debit
27,500
40,000
Credit
2,000
1,850
6,500
104,000
28,500
13,000
40,000
47,300
122,000
38,400
6,900
15,400
5,500
6,750
252,800
306,800
All the accounts appear to have their normal balance, but there is a difference between
total debits and credits of $54,000. When we divide this by 2, we get $27,000. But there
is no balance for this amount, so it’s not a doubling error. However, when we divide
$54,000 by 9, we get $6,000. If this is a transposition, the difference between the 4th and
5th digits from the right will be 6 (5 [first digit in $54,000] +1). The only candidate is
Accumulated Depreciation. The correct balance for Accumulated Depreciation must be
$28,500. When we correct this, the trial balance looks appears as follows.
Cash
Accounts Receivable
Allowance for Doubtful Accounts
Supplies on Hand
Prepaid Insurance
Equipment
Accum. Depreciation  Equipment
Accounts Payable
Long-term Notes Payable
S. Jones, Capital
Consulting Revenues
Wage Expense
Interest Expense
Rent Expense
Repairs Expense
Utilities Expense
Totals
Homework Solutions
Debit
27,500
40,000
1,850
6,500
104,000
38,400
6,900
15,400
5,500
6,750
252,800
Credit
2,000
28,500
13,000
40,000
47,300
122,000
252,800
11
Mastering Correction of Accounting Errors
4. In the trial balance below, total debits do not equal total credits. Find and correct the
likely error(s) to bring the totals into balance.
Cash
Accounts Receivable
Land
Accounts Payable
Note Payable
JT Howzer, Capital
Revenues
Wage Expense
Rent Expense
Interest Expense
Totals
Debit
24,732
75,109
Credit
647,604
54,811
176,400
587,332
649,998
423,788
110,000
7,308
217,149
2,539,933
Both Land and Wages Expense both have a normal debit balances so these two are in
the wrong column. When these errors are corrected, the trial balance appears as follows.
Cash
Accounts Receivable
Land
Accounts Payable
Note Payable
JT Howzer, Capital
Revenues
Wage Expense
Rent Expense
Interest Expense
Totals
Debit
24,732
75,109
647,604
423,788
110,000
7,308
1,288,541
Credit
54,811
176,400
587,332
649,998
1,468,541
The difference between total debits and total credits is $180,000 which, when divided by
9, equals $20,000. Take the first digit of the difference, 1, add 1 and you get 2. If it is a
transposition error, there will be a difference of 2 between the 5th and 6th digits from the
right. On the trial balance, we see three possible candidates: Land, Wage Expense and
Revenues. But if we flip the first two digits of Land or Wage Expense, total debits go
down and that does not solve the problem. That leaves Revenues. When we flip the 4
and the 6, we get $469,998 and the trial balance appears as follows.
Homework Solutions
12
Mastering Correction of Accounting Errors
Cash
Accounts Receivable
Land
Accounts Payable
Note Payable
JT Howzer, Capital
Revenues
Wage Expense
Rent Expense
Interest Expense
Totals
Debit
24,732
75,109
647,604
423,788
110,000
7,308
1,288,541
Credit
54,811
176,400
587,332
469,998
1,288,541
5. In the trial balance below, total debits do not equal total credits. Find and correct the
likely error(s) to bring the totals into balance.
Cash
Office Supplies
Equipment
Accum. Depreciation— Equipment
Accounts Payable
Wages Payable
W. Shannon, Capital
W. Shannon, Withdrawals
Entertainment Revenue
Rent Expense
Gas and Oil Expense
Wage Expense
Advertising Expense
Legal Expense
Totals
Debit
158,000
Credit
25,000
180,000
44,000
47,700
13,000
20,970
25,000
338,000
26,800
3,000
219,700
12,500
11,400
636.400
488,670
Office Supplies is an asset account, so it should have a normal debit balance. When this
error is corrected, the trial balance appears as follows.
Homework Solutions
13
Mastering Correction of Accounting Errors
Cash
Office Supplies
Equipment
Accum. Depreciation— Equipment
Accounts Payable
Wages Payable
W. Shannon, Capital
W. Shannon, Withdrawals
Entertainment Revenue
Rent Expense
Gas and Oil Expense
Wage Expense
Advertising Expense
Legal Expense
Totals
Debit
158,000
25,000
180,000
25,000
26,800
3,000
219,700
12,500
11,400
661.400
Credit
44,000
47,700
13,000
20,970
338,000
463,670
The difference between total debits and credits is now $197,730. Divide it by 9, and you
get $21,970. If it is a slide error, we need to find a balance in which the decimal point
was moved. Wage Expense has the right digits for a slide error and, when corrected to
$21,970, changes the trial balance to appear as follows.
Cash
Office Supplies
Equipment
Accum. Depreciation— Equipment
Accounts Payable
Wages Payable
W. Shannon, Capital
W. Shannon, Withdrawals
Entertainment Revenue
Rent Expense
Gas and Oil Expense
Wage Expense
Advertising Expense
Legal Expense
Totals
Homework Solutions
Debit
158,000
25,000
180,000
25,000
26,800
3,000
21,970
12,500
11,400
463,670
Credit
44,000
47,700
13,000
20,970
338,000
463,670
14
Mastering Correction of Accounting Errors
Section 4–CORRECTING CURRENT PERIOD ACCRUAL ERRORS
1. On August 1 of 20X0, your company borrows $100,000 and signs a 5-year note with
an annual interest rate of 8%. Principal and all accrued interest will be paid at
maturity. In January of 20X1, before the books are closed, you discover that no
interest was accrued for 20X0.
a. What is the correcting journal entry?
Interest Expense
Interest Payable
3,333
3,333
$100,000 × 8% × 5/12 = 3,333
b. If no correcting journal entry is recorded, how are the 20X0 income statement
and balance sheet, respectively, affected?
Without a correcting entry to recognize interest expense, the income statement
will overstate net income by $3,333 and the balance sheet will both overstate
retained earnings and understate liabilities (interest payable) by the same $3,333.
2. On May 1, 20X0, your company borrows $100,000 and signs a 10%, 5-year note
agreeing to pay the principal and all accrued interest at maturity. In January of 20X1,
before the books are closed, you discover that no interest was accrued for 20X0.
a. What is the correcting journal entry?
Annual interest is $10,000 ($100,000 × 10%), so the journal entry to record interest
for 20X0 would be a debit to Interest Expense and credit to Interest Payable for
$10,000. But interest expense for 20X0 should be $6,667 ($100,000 × 10% × 8/12 of
the year).
Interest Expense
Interest Payable
6,667
6,667
b. If no correcting journal entry is recorded, how are the 20X0 income statement
and balance sheet, respectively, affected?
c. Without a correcting entry to recognize interest expense, the income statement will
overstated net income by $6,667 and the balance sheet will both overstate retained
earnings and understate liabilities (interest payable) by the same $6,667.
3. On July 1, 20X0, your company lends a supplier $10,000 at an annual interest rate of
12%, with principal and all accrued interest due at the end of 3 years. In January of
20X1, before the books are closed, you discover that no interest was accrued for 20X0.
a. What is the correcting journal entry?
Interest Receivable
Interest Income
$10,000 × 12% × 6/12 = $600
600
600
(continued)
Homework Solutions
15
Mastering Correction of Accounting Errors
b. If no correcting journal entry is recorded, how are the 20X0 income statement and
balance sheet, respectively, affected?
Without a correcting entry to recognize interest income, the income statement will
overstate income by $6,667 and the balance sheet will overstate both retained
earnings and assets (interest receivable) by the same $6,667.
4. On June 1, 20X0, your company sublets warehouse space to James, Inc. for $500 a
month. James’s last rent payment was for October, 20X0. In January of 20X1, before
the books are closed, you discover that your company neither received nor recorded
rent for November and December.
a. What is the correcting journal entry?
Rent Receivable
Rent Revenue
1,000
1,000
$500 × 2 months = $1,000
b. If no correcting journal entry is recorded, how are the 20X0 income statement and
balance sheet, respectively, affected?
If rent revenue is not recorded, the income statement will understate net income by
$1,000 and the balance sheet will understate both retained and assets (rent
receivable) by the same $1,000.
5. On April 1, 20X0, your company sublets office space to Babin, Co. for $1,000 a month
on a lease that runs from April 1, 20X0, to November 30, 20X0. While preparing the
trial balance at year end, you see that December rent was accrued for Babin even
though the lease expired at the end of November.
a. What is the correcting journal entry?
Rent Revenue
Rent Receivable
1,000
1,000
b. If no correcting journal entry is recorded, how are the 20X0 income statement and
balance sheet, respectively, affected?
Without a correcting entry to reduce the amount of revenue recognized for the year,
the income statement will overstate net income by $1,000 and the balance sheet will
overstate both retained earnings and assets (rent receivable) by the same $1,000.
6. In January 20X1, before closing the books for 20X0, you notice that the December
20X0 utility bill of $600 was neither paid nor recorded?
a. What is the correcting journal entry?
Utilities Expense
Utilities Payable
600
600
b. If no correcting journal entry is recorded, how are the 20X0 income statement and
balance sheet, respectively, affected?
With a correcting journal entry to recognize utilities expense, the income statement
will overstate net income by $600 and the balance sheet will both overstate retained
earnings and understate liabilities (utilities payable) by the same $600.
Homework Solutions
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Mastering Correction of Accounting Errors
Section 5–CORRECTING CURRENT PERIOD DEFERRAL ERRORS
1. During 20X0, your company purchases $2,000 of supplies and books the amount as an
asset. As you prepare the trial balance on December 31, you see that there is no 20X0
supplies expense. A quick physical count reveals $700 of supplies on hand.
a. What is the correcting journal entry?
Supplies Expense
Supplies on Hand
1,300
1,300
$2,000 supplies purchased  $700 supplies on hand = $1,300 used up
b. If no correcting journal entry is recorded, how are the 20X0 income statement and
balance sheet, respectively, affected?
Without a correcting entry to recognize supplies expense for the year, the income
statement will overstate net income by $1,300 and the balance sheet will overstate both
retained earnings and assets (supplies on hand) by the same $1,300.
2. On March 1, 20X0, your company prepays $1,800 to rent equipment for 12 months and
you book the amount as an asset. A review of year-end adjusting entries shows a debit
to Rent Expense and credit to Prepaid Rent for $1,800.
a. What is the correcting journal entry?
Rent expense for 10 months is $1,500 ($1,800/12 × 10 months). That means $300 of
rent expense must be deferred to next year. So, the correcting entry is:
Prepaid Rent
Rent Expense
300
300
b. If no correcting journal entry is recorded, how are the 20X0 income statement and
balance sheet, respectively, affected?
Without a correcting entry to adjust rent expense for the year, the income statement
will understate net income by $300 and the balance sheet will understate both
retained earnings and assets (prepaid rent) by the same $300.
3. On June 1, 20X0, your company takes out a 1-year insurance policy for $3,600 and
prepays the entire amount, recording the amount as an asset. At year-end 20X0, you
discover an adjusting entry that records one year’s insurance expense of $1,800.
a. What is the correcting journal entry?
Insurance expense for the year is $2,100 ($3,600/12  7 months). So we need to
recognize another $300 ($2,100  $1,800). So, the correcting entry is:
Insurance Expense
Prepaid Insurance
300
300
b. If no correcting journal entry is recorded, how are the 20X0 income statement and
balance sheet, respectively, affected?
Without a correcting entry to recognize the additional insurance expense, the income
statement will overstate net income by $300 and the balance sheet will overstate
both retained earnings and assets (prepaid insurance) by the same $300.
Homework Solutions
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Mastering Correction of Accounting Errors
4. On May 1, 20X0, your company takes out a 2-year insurance policy for $2,400 a year
and prepays the entire $4,800, recording the amount as an expense. At year-end 20X0,
you discover an adjusting entry defers $3,600 of insurance expense.
a. What is the correcting journal entry?
The adjusting entry recognized $1,200 of insurance expense ($4,800  $3,600). But
20X0 insurance expense is $1,600 ($2,400/12  8 months), so we need to record an
additional $400 ($1,600 - $1,200) and reduce the balance in Prepaid Insurance by
the same amount. So, the correcting entry is:
Insurance Expense
Prepaid Insurance
400
400
b. If no correcting journal entry is recorded, how are the 20X0 income statement and
balance sheet, respectively, affected?
Without a correcting entry, too little insurance expense will be recognized. As a
result, the income statement will overstate net income by $400 and the balance
sheet will overstate both retained earnings and assets (prepaid insurance) by the
same $400.
5. On July 1, 20X0, your company sublets warehouse space for $600 a year. ABC takes a
2-year lease and pays $1,200 upon signing, which you record as a liability. At year-end
20X0, you discover that the adjusting entry recognizes $600 in rent revenue.
a. What is the correcting journal entry?
Rent revenue for the year is $300 ($600/12  6 months), but $600 was recognized.
That means we need to reduce the balance in rent revenue by $300 ($600  $300)
and transfer it to a liability account. So, the correcting entry is:
Rent Revenue
Rent Received in Advance
300
300
b. If no correcting journal entry is recorded, how are the 20X0 income statement and
balance sheet, respectively, affected?
Without a correcting entry to reduce the amount of rent revenue recognized for the
year, the income statement overstate net income by $300 and the balance sheet will
both overstate retained earnings and understate liabilities (rent received in advance)
by the same $300.
Homework Solutions
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Mastering Correction of Accounting Errors
6. On October 1, 20X0, your company sublets warehouse space to for $900 a year to DEF,
which pays in full upon signing and the amount is recorded as revenue. At year-end
20X0, you discover an adjusting entry that defers $300 of revenue.
a. What is the correcting entry?
The adjusting entry debited Rent Revenue for $300 and credited Rent Received in
Advance for $300. That means your company recognized $600 of rent revenue for the
year ($900  $300)—but earned only $225 ($900/12  3 months). To recognize the
correct amount of only $225, your company should have deferred $675 ($900  $225).
To correct this, we need to reduce rent revenue by $375 ($675  $300) and transfer
$375 from Rent Revenue to a liability account. So the correcting entry is:
Rent Revenue
Rent Received in Advance
375
375
b. If no correcting journal entry is recorded, how are the 20X0 income statement and
balance sheet, respectively, affected?
Without a correcting entry to reduce the amount of rent revenue recognized for the
year, the income statement will overstate net income by $375 and the balance sheet
will both overstate retained earnings and understate liabilities (rent received in
advance) by the same $375.
7. On June 1, 20X0, your company sublets warehouse space for $1,800 a year to GHI,
which pays in full upon signing and that you record as revenue. At year-end 20X0, you
discover an adjusting entry that transfers $900 from Revenue to Deferred Revenue.
a. What is the journal correcting entry?
The adjusting entry debited Rent Revenue for $900 and credited Rent Received in
Advance for $900. But your company should recognize rent revenue of $1,050
($1,800/12  7 months). To correct this error, we need to increases the amount of
rent revenue recognized to $150 ($900  $750) and reduce the liability account by
the same amount. So, the correcting entry would be:
Rent Received in Advance
Rent Revenue
150
150
b. If no correcting journal entry is recorded, how are the 20X0 income statement and
balance sheet, respectively, affected?
Without a correcting entry to increase the amount of rent revenue recognized for the
year, the income statement will understate net income by $150 and the balance
sheet will both understate retained earnings by $150 and overstate liabilities (rent
received in advance) by $150.
Homework Solutions
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Mastering Correction of Accounting Errors
8. On July 1, 20X0, your company takes out a 2-year insurance policy for $2,400 a year
and pays the entire amount upon signing, recording the amount as an expense. At yearend 20X0, you discover an adjusting entry that defers $1,800 by debiting Prepaid
Insurance.
a. What is the correcting journal entry?
The adjusting entry debited Prepaid Insurance and credited Insurance Expense for
$1,800. This resulted in recognizing insurance expense for the year of $3,000 ($4,800
 $1,800). But the correct amount of insurance expense for 20X0 is $1,200 ($2,400/12
 6 months). We need to reduce the balance in Insurance Expense by $1,800 ($3,000
 $1,200) and increase Prepaid Insurance by the same amount. So, the correcting
entry is:
Prepaid Insurance
Insurance Expense
1,800
1,800
b. If no correcting journal entry is recorded, how are the 20X0 income statement and
balance sheet, respectively, affected?
Without a correcting entry to reduce the amount of insurance expense recognized for
the year, the income statement will understate net income by $1,800 and the
balance sheet will understate both retained earnings and assets (prepaid insurance)
by the same $1,800.
Homework Solutions
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