Question

Question 5: Vance Company reported net incomes for a three-year period as follows: 2014, $186,000; 2015, $189,000; 2016, $180,000. In reviewing the accounts in 2017 after the books for the prior year have been closed, you find that the following errors have been made in summarizing activities: 2014 2015 2016 Overstatement of ending inventory $42,000 $51,000 $24,000 Understatement of accrued advertising expense 6,600 12,000 7,200 Instructions: (a) Determine corrected net incomes for 2014, 2015, and 2016. (b) Give the entry to bring the books of the company up to date in 2017, assuming that the books have been closed for 2016.

Answer 1

To determine the corrected net incomes for 2014, 2015, and 2016, adjust for the errors made in summarizing activities. The corrected net incomes are $144,000 for 2014, $126,000 for 2015, and $163,200 for 2016. To bring the books up to date in 2017, make adjusting entries which include decreasing inventory and increasing advertising expense.

Step-by-step explanation:

To determine the corrected net incomes for 2014, 2015, and 2016, we need to adjust for the errors made in summarizing activities. For 2014, the ending inventory was overstated by $42,000. So, we subtract $42,000 from the reported net income of $186,000, which gives us a corrected net income of $144,000. Similarly, for 2015 and 2016, we subtract the respective amounts of overstatement and understatement from the reported net incomes to get the corrected net incomes:

• 2015: $189,000 - $51,000 (overstatement) - $12,000 (understatement) = $126,000
• 2016: $180,000 - $24,000 (overstatement) + $7,200 (understatement) = $163,200

To bring the books of the company up to date in 2017, assuming that the books have been closed for 2016, we need to make adjusting entries for the errors discovered. The following entry would be made:

Dr. Inventory $66,000 (42,000 + 51,000 - 24,000)
Dr. Advertising Expense $25,800 (6,600 + 12,000 + 7,200)
Cr. Retained Earnings $91,800 (66,000 + 25,800)

Answer 2

Corrected net incomes for Vance Company are $150,600 for 2014, $114,600 for 2015, and $124,200 for 2016 after adjusting for inventory overstatements and advertising expense understatements. The entry to update the books involves debiting 'Retained Earnings' and crediting 'Inventory' and 'Advertising Expense' for the sums of errors across the years.

Step-by-step explanation:

To correct the net incomes for Vance Company for the years 2014, 2015, and 2016, we need to adjust the reported net incomes by taking into account the overstatement of ending inventory and the understatement of accrued advertising expense for each year. The corrected net incomes are calculated as follows:

• 2014: Corrected Net Income = Reported Net Income - Overstatement of Ending Inventory + Understatement of Accrued Advertising Expense = $186,000 - $42,000 + $6,600 = $150,600.
• 2015: Corrected Net Income = Reported Net Income - Overstatement of Ending Inventory (for both 2014 and 2015) + Understatement of Accrued Advertising Expense (for both 2014 and 2015) = $189,000 - $42,000 - $51,000 + $6,600 + $12,000 = $114,600.
• 2016: Corrected Net Income = Reported Net Income - Overstatement of Ending Inventory (for 2015 and 2016) + Understatement of Accrued Advertising Expense (for 2015 and 2016) = $180,000 - $51,000 - $24,000 + $12,000 + $7,200 = $124,200.

To bring the books of the company up to date in 2017, the journal entry would reflect the aggregation of errors corrected:

• Debit 'Retained Earnings' for the total overstatement of net income.
• Credit 'Inventory' for the total overstatement of inventory.
• Credit 'Advertising Expense' for the total understatement of the advertising expense.

The amounts would be the sum of overstated/understated amounts for all applicable years.