Question

On December 12, 2021, an investment in equity securities costing $77,000 was sold for $94,000. The total of the sale proceeds was credited to the investment in equity securities account. Required: 1. Prepare the journal entry to correct the error, assuming it is discovered before the books are adjusted or closed in 2021. (Ignore income taxes.) 2. Prepare the journal entry to correct the error assuming it is not discovered until early 2022. (Ignore income taxes.)

Answer 1

Correct journal entries are needed when an error is made in recording the sale of equity securities. These include adjusting the Investment in Equity Securities, Cash, and Gain on Sale of Investments accounts. The steps differ slightly if the error is discovered before or after the books are closed.

Step-by-step explanation:

When an investment in equity securities is sold, the correct journal entries must record both the sale proceeds and the resulting gain or loss. If an error was made, it needs to be corrected to reflect the accurate financial position of the company. Here are the journal entries to correct the sale of equity securities that was improperly recorded:

1. Correction Before Books are Adjusted or Closed in 2021:
2. Debit the Investment in Equity Securities account for $94,000 to reverse the incorrect total credit.
3. Credit the Cash account for $94,000 to record the receipt of cash from the sale.
4. Credit the Investment in Equity Securities account for $77,000 to remove the original cost of the investment.
5. Credit the Gain on Sale of Investments account for $17,000 to record the gain on the sale (which is the difference between the sale price and the cost of the investment).
6. Correction After Books are Adjusted or Closed in 2021:
7. Debit the Retained Earnings account for $17,000 to reverse the gain that was not recorded in the prior period.

1. Credit the Gain on Sale of Investments account for $17,000 to record the gain.
2. Follow steps 1 and 2 from the first correction to adjust the Investment in Equity Securities and Cash accounts.

Answer 2

1.

Dr. Investment Account $17,000

Cr. Gain on Sale $17,000

2.

Dr. retained Earning $17,000

Cr. Gain on Sale $17,000

Step-by-step explanation:

1.

If an assets is sold more than the book value, then there is a gain on the sales of asset.

Gain on Sale = Sales Proceeds - Book value of Investment = $94,000 - $77,000 = $17,000

As sales proceeds of $94,000 are credited in the Investment account, which needs to be credited by $77,000 only. The excessive amount of $17,000 should be recorded in the Gain on sale account.

2.

Error is not discovered until 2022 and earning for 2021 was transferred to retained earning. So, adjustment should me made in the retained earnings to eliminate the effect.