Question

Below are three independent and unrelated errors. On December 31, 2017, Wolfe-Bache Corporation failed to accrue office supplies expense of $1,400. In January 2018, when it received the bill from its supplier, Wolfe-Bache made the following entry: Office supplies expense 1,400 Cash 1,400 On the last day of 2017, Midwest Importers received a $82,000 prepayment from a tenant for 2018 rent of a building. Midwest recorded the receipt as rent revenue. At the end of 2017, Dinkins-Lowery Corporation failed to accrue interest of $7,200 on a note receivable. At the beginning of 2018, when the company received the cash, it was recorded as interest revenue.

Required: For each error: 1. What would be the effect of each error on the income statement and the balance sheet in the 2017 financial statements

Answer 1

The failure to accrue office supplies expense by Wolfe-Bache Corporation, the mistaken recognition of prepayment as rent revenue by Midwest Importers, and the omission of interest accrual by Dinkins-Lowery Corporation each led to misstatements on their balance sheets and income statements for 2017.

Step-by-step explanation:

For each of the three errors made by the corporations, the effects on the income statement and the balance sheet for the 2017 financial statements will be as follows:

1. Wolfe-Bache Corporation failed to accrue office supplies expense of $1,400. The effect would be an overstatement of net income and an overstatement of assets (Prepaid or Office Supplies) and an understatement of expenses on the income statement. A correct entry would have been to debit Office Supplies Expense and credit Accounts Payable to recognize the incurred expense.
2. Midwest Importers recorded a prepayment as rent revenue. This error results in an overstatement of revenue and net income and does not reflect the liability of unearned rent. The correct treatment would have been to debit Cash and credit Unearned Revenue on the balance sheet.
3. Dinkins-Lowery Corporation did not accrue interest on a note receivable. This omission leads to an understatement of interest revenue and receivables, and consequently net income on the income statement. They should have made an accrual by debiting Interest Receivable and crediting Interest Revenue.

Answer 2

1. Balance sheet- understatement to current liability by $1,400 (accrued supplies)

Income statement - overstatement of income by $1,400

2. Balance sheet - understate current liability (unearned revenue) by $82,000

Income statement - overstatement to revenue by $82,000 which also overstates income by same amount

3. Balance sheet - understatement of current asset (interest receivable) by $7,200

Income statement - Understated revenue by $7,200 which will result to understated income by same amount

Step-by-step explanation:

•Income statement is affected by all transaction with nominal accounts and balance sheet affects all transaction with real accounts.

•Failure to recognize Wolfe-Bache’s accrued supplies expense resulted to understated expense which in turns overstates income by $1,400. In relation to that is an understatement to current liability (accrued supplies expense) by $1,400. Missed entry below:

Dr supplies expense $1,400 (nominal account)

Cr Accrued supplies expense $1,400 (real account)

•Midwest mistake of recognition unearned rent as rent revenue will result to an overstatement of revenue by $82,000 and understatement of current liability (unearned rent income) by $82,000. Adjustment entry below:

Dr Rent revenue $82,000

Cr Unearned rent revenue $82,000

•Dinkins-Lowery’s failure to recognize accrued interest will result to understatement to revenue by $7,200 and understatement to current asset (interest receivable) by $7,200. Entry is Debit interest receivable $7,200 and credit interest revenue $7,200.