MASTERING CORRECTION OF ACCOUNTING ERRORS TESTBANK SOLUTIONS

5-9 On September 1, 20X8, your calendar year company pays $2,400 for 12 months' insurance, recording the amount as an asset. Just before closing the books, you realize that no adjusting entry was recorded. Without it: a. net income will be overstated b. assets will be understated c. liabilities will be overstated d. none of the above

a The original entry was to debit prepaid insurance for $2,400. The correct amount of insurance expense for 20X8 is $800 ($2,400/12 x 4 months). If no adjusting entry is made to record this amount, Insurance Expense will be understated and net income will be overstated. Assets (Prepaid Insurance) will be overstated as well.

1-1 How frequently should the bank reconciliation be performed? a. Monthly b. Weekly c. Each time wages are paid to employees d. As frequently as is necessary to find errors

a. A bank reconciliation should be performed each month when the monthly bank statement is received.

3-4 A trial balance may reveal: a. a transposition error b. an omission error c. a classification error d. a bank reconciliation error

a. A transposition error will cause debits and credits not to agree and therefore can be discovered through preparation of a trial balance.

1-2 At year-end 20X2, you see that no insurance expense was recorded for 20X1. On July 1, 20X1, your company had prepaid a 2-year policy for $4,800, debiting Prepaid Insurance and crediting Cash. Correcting this error requires: a. a prior period adjustment b. a current period adjustment c. both a and b d. neither a nor b

a. Because insurance expense for 20X1 was understated, the 20X1 ending balance of retained earnings was also understated. Correcting this error will require a prior period adjustment because the 20X1 books are closed.

2-7 During the bank reconciliation, you notice that the bank deducted $3,321 for check 3201, which was made out for $3,123. What adjustment do you make? a. Increase the bank balance by $198 b. Reduce the bank balance by $198 c. Increase the book balance by $198 d. Reduce the book balance by $198

a. The bank's error requires an adjustment to the bank statement balance that adds back the $2,198 mistakenly deducted.

5-4 On March 31, 20X8, your calendar year company takes out a 3-year insurance policy with a premium of $4,000 a year and pays the entire $12,000 in advance, booking it as prepaid insurance. At year-end 20X8, you discover that the adjusting entry debits Insurance Expense and credits Prepaid Insurance for $4,000. If you do not correct this: a. net income will be understated b. assets will be overstated c. liabilities will be understated d. none of the above

a. The correct amount of Insurance Expense at the end of 20X8 is $3,000 ($12,000/36 months × 9 months). The correcting entry would be to debit Prepaid Insurance for $1,000 ($4,000 - $3,000) and credit Insurance Expense for $1,000. If this entry is not made, expenses will be overstated, thereby understating net income. Total assets will be understated.

5-7 On July 1, 20X8, your calendar year company prepays $12,000 for 3 years' rent and records the amount as an asset. At year end, you discover that the adjusting entry debits Rent Expense and credits Prepaid Rent for $1,000. Without a correcting entry: a. assets will be overstated b. liabilities will be understated c. net income will be understated d. none of the above

a. The correct amount of rent expense for 20X8 is $2,000 ($12,000/36 × 6 months), not $1,000. Therefore, if no correcting is made, Rent Expense will be understated, thereby overstating net income. Assets (Prepaid Rent) will be overstated as well.

2-1 You are performing a bank reconciliation for August 20X1. The balance per bank is $21,863; the ledger Cash balance, $17,250. Outstanding checks are as follows: Check Number------Amount 2003------ $ 560 2004------ 910 2008------ 1,700 2009------ 2,110 You have also identified the following: · A $13 bank service charge for August · An NSF check for $720 · Check #1996, made out to Local Gas & Electric for $798, was booked as $870 · A $6 charge for your bank's Web Banking, which the company does use To reconcile the balance per book to the balance per bank will require adjusting the book balance by: a. $661 b. $727 c. $733 d. $648

a. The required adjustments to the book balance are: - $13 for the bank service charge - $720 for the NSF check = ($733) + $72 for the $72 posting error ($870 - $798) = $661 reduction in the book balance. Bring the book balance to $16,589. The $5,280 in outstanding checks and $6 Web Banking service fee are adjustments to the bank balance.

2-3 In a bank reconciliation, to adjust for a bank charge for another company's check requires: a. increasing the bank balance by the amount of the check b. reducing the bank balance by the amount of the check c. increasing the book balance by the amount of the check d. reducing the book balance by the amount of the check

a. This is a bank error, so the adjustment is to add to the bank balance the amount of the other company's check.

4-7 On November 1, 20X4, DumpCo debits Cash and credits Notes Payable for $20,000 for a note maturing on May 1, 20X5, when principal and accrued interest of 6% a year is due. If, on December 31, 20X4, you discover that no adjusting entry was made to accrue interest for 20X4, you will record an entry that includes: a. a debit to Interest Payable for $400 b. a debit to Interest Expense for $200 c. a credit to Interest Payable for $400 d. none of the above

b The correct amount of accrued interest at the end of the year is $200 ($20,000 x 6% x 2/12). The entry to accrue the interest for 20X4 will be a debit to Interest Expense and a credit to Interest Payable for $200.

3-2 On a trial balance, there is difference between total debits and total credits divisible by 9. If this is the only error, you can track it down and make the correction if this is: a. an omission error b. a slide error c. a doubling error d. a misclassification error

b. An omission error cannot be detected by unequal debits and credits because both totals would be unequal by the same amount. A doubling error can be detected if the difference between total debits and credits is divisible by 2 (not 9). A slide error is the result of one or more zeros being added to or subtracted from a balance, not a 9. Transposition errors can be detected if the difference is divisible by 9. Omission errors and misclassification errors cannot be detected by reviewing the trial balance.

5-2 Your company purchases $2,000 of supplies and books the amount as prepaid office supplies. At year end, a physical count shows $700 of supplies on hand. If the adjusting entry debits Supplies Expense and Supplies On Hand for $700: a. net income will be understated b. assets will be overstated c. liabilities will be understated d. none of the above

b. The adjusting entry should have been a debit Supplies Expense and credit Supplies on Hand for $1,300 ($2,000 purchased - $700 left at year end). If uncorrected, Supplies Expense will be understated, which will overstate net income. Assets (Supplies on Hand) will be overstated as well.

5-6 Your company purchases $3,000 of supplies, recording them as assets. At year end, a physical count shows $1,200 of supplies on hand. The year-end adjusting entry debits Supplies Expense and credits Supplies On Hand for $1,200. The correcting entry will: a. debit to Supplies Expense for $1,800 b. credit to Supplies On Hand for $600 c. credit to Supplies Expense for $600 d. no correcting entry is necessary

b. The adjusting entry should have been to debit Supplies Expense and credit Supplies on Hand for $1,800. Thus, an additional $600 ($1,800 - $1,200) needs to be expensed. The correcting entry involves debiting Supplies Expense and crediting Supplies for $600.

5-5 On November 1, 20X3, your calendar year company receives $40,000 for space it is subletting for 5 months at $8,000 a month, from November 1, 20X3 through March 31, 20X4, and books the amount as Rent Revenue. On December 31, 20X3, you discover the following adjusting entry: Rent Revenue 32,000 Rent Received in Advance 32,000 a. debit Rent Revenue and credit Rent Received in Advance for $8,000 b. debit Rent Received in Advance and credit Rent Revenue for $8,000 c. debit Rent Revenue and credit Rent Received in Advance for $16,000 d. debit Rent Received in Advance and credit Rent Revenue for $16,000

b. The amount of rent revenue currently recognized is $8,000 ($40,000 - $32,000). The correct amount of rent revenue at the end of 20X3 is $16,000 ($8,000 ´ 2 months). Therefore, the correct adjusting entry would be to debit Rent Received in Advance and credit Rent Revenue for $8,000. Without this correcting entry, rent revenue (and net income) will be understated, and total liabilities will be overstated.

2-10 The following checks were outstanding when you did last month's bank reconciliation and remain outstanding this month: Check number Amount 3452 ------------ $1,000 3454 ------------ 1,500 3455 ------------ 2,000 What adjustment should you make this month? a. Increase the bank balance by $4,500 b. Reduce the bank balance by $4,500 c. Increase the book balance by $4,500 d. Reduce the book balance by $4,500

b. The checks on your books have not cleared the bank, so the adjustment must reduce the bank balance by the total of the checks outstanding.

5-10 On November 1, 20X8, your calendar year company pays $1,200 for 12 months' insurance, recording it as an expense. Just before closing the books, you realize that no adjusting entry was made. The correct entry must: a. credit an asset account for $1,000 b. credit an expense account for $1,000 c. debit an expense account for $200 d. debit an asset account for $200

b. The original entry made was to debit Insurance Expense and credit Cash for $1,200. The correct amount of insurance expense for the year is $200 ($1,200/12 × 2 months). The correcting entry would be debit Prepaid Insurance and credit Insurance Expense for $1,000 ($1,200 - $200).

2-4 In a bank reconciliation, to adjust for in incorrect deposit of $1,000 from another company in your account requires: a. increasing the bank balance by the amount of the deposit b. reducing the bank balance by the amount of the deposit c. increasing the book balance by the amount of the deposit d. reducing the book balance by the amount of the deposit

b. This is a bank error, so the adjustment is a deduction from the bank balance of $1,000 for amount mistakenly credited to your account.

2-6 Your company writes a check for $123, but records it as $132. To adjust for this in a bank reconciliation, you would: a. increase the bank balance by $9 b. increase the book balance by $9 c. reduce the bank balance by $9 d. reduce the book balance by $9

b. This is a book error. Because the ledger Cash balance is $9 lower than it should be, the adjustment must add back $9.

4-5 A calendar year company plans to pay its December gas bill in January. As of December 31, no adjusting entry has been recorded. As a result: a. the balance sheet total will overstate assets b. the balance sheet total will overstate retained earnings c. the income statement total overstate expenses d. the balance sheet total will overstate liabilities

b. Unless Utilities Expense is increased (debited) for the amount of the expense already incurred, expenses will be understated, so both net income and retained earnings will be overstated. Although it is not one of the possible answers, liabilities (Utilities Payable) will also be understated on the balance sheet.

1-5 GrayCo estimates debt using 2% of net sales, but you discover that this year someone used 4% of net sales. This is: a. a transposition error b. an incorrect estimate c. incorrect use of an accounting principle d. a slide error

b. an incorrect estimate

2-9 The bank statement balance of $7,850 does not include $1,200 in checks outstanding and $750 deposits in transit. When the bank balance is adjusted, it will be: a. $7,850 b. $7,415 c. $7,400 d. $7,385

c. $7,850 - $1,200 checks outstanding + $750 deposits in transit = $7,400 balance per bank.

4-4 Your employer has a Monday-Friday workweek and distributes its $35,000 payroll each Friday. In 20X2, December 31 is a Tuesday. One of your assistants debited Salaries Expense and credited Salaries Payable for $18,000. Your correcting entry will: a. debit Salaries Expense for $6,000 b. debit Salaries Payable for $6,000 c. credit Salaries Expense for $4,000 d. credit Salaries Payable for $4,000

c. Accrued salaries at the end of the year are $14,000. To compute: $35,000/5 = $7,000 per day × 2 days = $14,000, not $18,000. The correcting entry must debit Salaries Payable and credit Salaries Expense for $4,000.

3-1 The unadjusted trial balance shows total debits of $66,000 and total credits of $68,600. If there is only one type of error, which type would you look for? a. Slide b. Transposition c. Doubling d. Misclassification

c. If the error is a slide, there will be an unreasonable balance. But a difference between total debits and credits of $2,600 is not unreasonable, so it is highly unlikely that this is a slide error. If it is a transposition error, the difference between total debits and credits can be divided by 9 and $2,600 cannot be. If it is a doubling error, the difference between total debits and credits is divisible by 2, which $2,600 is. A misclassification error would not cause total debits and credits to be unequal.

4-6 On March 1, 20X1, your calendar year company borrows $10,000. Terms require repayment of principal and annual interest of 9% after 4 years. At year-end 20X1, an adjusting entry accrues $550 interest expense. If you discover the error before the books are closed, what is the correcting entry? a. Interest Payable 600 ------------ Interest Expense 600 b. Interest Expense 600 ------------ Interest Payable 600 c. Interest Expense 200 ------------ Interest Payable 200 d. Interest Expense 200 ------------ Interest Payable 200

c. The correct amount of accrued interest at the end of the year is $750. To compute: ($10,000 × 9% × 10/12). Because the adjusting entry accrued $550 of interest, the correcting entry would be to debit Interest Expense and credit Interest Payable for the additional $200 that needs to be accrued.

5-3 On March 31, 20X8, your calendar year company takes out a 3-year insurance policy with a premium of $5,000 a year and pays the entire $15,000 in advance, booking it as prepaid insurance. On December 31, 20X8, you discover that the adjusting entry debited Insurance Expense and credited Prepaid Insurance for $5,000. Your correcting journal entry will: a. debit Insurance Expense for $3,750 b. debit Prepaid Insurance for $5,000 c. credit Insurance Expense for $1,250 d. credit Insurance Expense for $3,750

c. The correct amount of insurance expense at the end of 20X8 is $3,750 ($15,000/36 months × 9 months). It was incorrectly recorded at $5,000. The correcting entry would be to debit Prepaid Insurance for $1,250 ($5,000 - $3,750) and credit Insurance Expense for $1,250.

5-8 On October 1, 20X8, your calendar year company prepays $10,000 for 2 years' rent, recording the entire $10,000 as an expense. At year end, you discover that the adjusting entry debits Prepaid Rent and credits Rent Expense for $5,000. The correcting entry must: a. debit Rent Expense for $2,500 b. debit Prepaid Rent for $1,250 c. credit Rent Expense for $3,750 d. none of the above

c. The correct amount of rent expense is $1,250 ($10,000/24 × 3 months). The correcting entry would involve debiting Prepaid Rent and crediting Rent Expense for $3,750 ($5,000 - $1,250).

4-1 If you accrue expenses of $130 instead of $150, the financial statements will: a. overstate assets and understate expenses b. understate prepaid expenses c. understate both liabilities and expenses d. overstate liabilities

c. The credit to the payable (liability) account was for too little, so liabilities will be understated and the debit to the expense account was also for too little, so that expenses will be understated.

4-2 On November 1, 20X4, ComCo debits Cash and credits Notes Payable for $20,000 for a note maturing May 1, 20X5. At that time, ComCo must repay the entire $20,000 plus interest of 6% accrued annually. If no adjusting entry is made at year-end 20X4, ComCo will record a correcting entry that: a. debits Interest Expense for $400 b. credits Interest Payable for $100 c. debits Interest Expense for $200 d. none of the above

c. The required entry involves a debit to Interest Expense and a credit to Interest Payable for $200. To compute: $20,000 × 6% = $1,200 × 2/12 = $200.

2-5 In a bank reconciliation, to adjust for the bank's deducting $980 for a company check that you wrote and booked for $890 requires: a. increasing the book balance by $90 b. reducing the book balance by $90 c. increasing the bank balance by $90 d. reducing the bank balance by $90

c. This is a bank error that caused the bank balance to be too low, so the adjustment must add back the $90 mistakenly deducted.

4-8 Your calendar year company completes a $6,000 job, of which $1,000 has been received by year end and credited to Revenue. If you discover before the books are closed that no adjusting entry was made, your correcting entry will: a. debit Revenue for $5,000 b. debit Accounts Receivable for $6,000 c. credit Accounts Receivable for $5,000 d. none of the above

d The correcting entry would involve a debit to Accounts Receivable and a credit to Revenue for $5,000.

4-3 Your employer has a Monday-Friday workweek and distributes its $20,000 payroll each Friday. In 20X1, December 31 is a Thursday. One of your assistants debited Salaries Expense and credited Salaries Payable for $12,000. If no correcting entry is recorded: a. the balance sheet will overstate assets b. the income statement will over state expenses c. the balance sheet will overstate liabilities d. the balance sheet will overstate retained earnings

d. Accrued salaries at the end of the year are $16,000: To compute: $20,000/5 = $4,000 × 4 days = $16,000, not $12,000. Unless a correcting entry is made, expenses will be understated on the income statement so net income and retained earnings will be overstated on the balance sheet. Although it is not one of the possible answers, liabilities (salaries payable) will also be understated on the balance sheet.

2-2 In a bank reconciliation, to adjust for a customer's NSF check requires: a. increasing the bank balance by the amount b. reducing the bank balance by the amount c. increasing the book balance by the amount d. reducing the book balance by the amount

d. Because the amount on the NSF check is still on the books, it must be deducted from the ledger Cash account to conform the book balance to the bank balance.

5-1 Which of the following is a deferral error? a. Failure to calculate and record interest expense owed on a note payable b. Debiting Accounts Payable and crediting Revenue when billing a customer c. Failure to book revenue earned but not received as of year end d. Failure to adjust Unearned Revenue at year end

d. Failing to record interest expense on notes payable is a type of accrual error, as is failing to post revenue earned for which no payment had been received. Debiting Accounts Payable instead of Accounts Receivable is a misclassification error.

2-8 During the bank reconciliation, you see that the following checks have not cleared: Check Number------Amount 2003------------ $2,300 2004------------ 2,400 2005------------ 2,500 2006------------ 3,300 What adjustment should you make? a. Increase the book balance by $10,500 b. Reduce the book balance by $10,500 c. Increase the bank balance by $10,500 d. Reduce the bank balance by $10,500

d. These checks are on your books but have not cleared the bank, so the adjustment must reduce the bank balance by the total of the four checks outstanding.

1-4 Bad debt expense of $500 recorded as $5,000 is an example of: a. a transposition error b. incorrect use of an estimate c. a classification error d. a slide error

d. This is a slide error because the decimal point was moved left one decimal place.

1-3 Company accounting departments perform periodic reviews to ensure the reliability of company accounting procedures during: a. preparation of the trial balance b. a review of adjusting journal entries c. an external audit d. an internal audit

d. an internal audit