Question

On December 12, 2018, an equity investment costing $80,000 was sold for $100,000. The investment was carried in the balance sheet at $75,000, and was accounted for under the equity method. An error was made in which the total of the sales proceeds was credited to the investment account.

1) prepare the journal entry to correct the error assuming it is discovered before the books are adjusted or closed in 2018.

2) Prepare the journal entry to correct the error assuming it is not discovered until early 2019.

Answer 1

1) prepare the journal entry to correct the error assuming it is discovered before the books are adjusted or closed in 2018.

The first entry was:

December 21, 2018, equity investment sold:

Dr Cash 100,000

Cr Investments 100,000

The correct entry should have been:

Dr Cash 100,000

Cr Investments 80,000

Cr Gain on sale 20,000

So the adjusting entry is:

Dr Investments 20,000

Cr Gain on sale 20,000

2) Prepare the journal entry to correct the error assuming it is not discovered until early 2019.

Instead of adjusting gain on sale, we must adjust retained earnings since gain on sale would have been closed at the end of the year:

Dr Investments 20,000

Cr Retained earnings 20,000