Question

In 2015, Hillsboro Co. determined that it incorrectly overstated its accounts receivable and sales revenue by $100,000 in 2014. In 2015, Hillsboro makes the following entry to correct for this error (ignore income taxes). What is the entry made by Hillsboro Co. to correct the error?

1) Debit Accounts Receivable $100,000; Credit Sales Revenue $100,000
2) Debit Sales Revenue $100,000; Credit Accounts Receivable $100,000
3) Debit Accounts Receivable $100,000; Credit Retained Earnings $100,000
4) Debit Retained Earnings $100,000; Credit Accounts Receivable $100,000

Answer 1

The correct journal entry to rectify the overstated accounts receivable and sales revenue from the previous year is to debit Retained Earnings and credit Accounts Receivable by $100,000. The correct option is D.

Step-by-step explanation:

The correct entry for Hillsboro Co. to correct the error of overstating accounts receivable and sales revenue by $100,000 in 2014 would be:

Debit Retained Earnings $100,000
Credit Accounts Receivable $100,000

When errors are discovered in a subsequent year, the correction is reflected in retained earnings because the prior year's income statement has already been closed. This entry eliminates the overstated accounts receivable and corrects the retained earnings, which were previously overstated due to the overstatement of sales revenue.