E2-12. Error Correction
Requirement 1:
At the end of 2016, inventory is understated by $8,000 and must be corrected.
Accumulated depreciation is overstated by $22,300 – $6,000 = $16,300 and
must also be corrected. Note that we determined these amounts differently.
Inventory is a balance sheet account and we are given the amount by which it
The correcting journal entry is as follows:
To understand why the balancing line of the entry is in Retained earnings,
consider how the Inventory and Accumulated depreciation accounts became
misstated. Amounts in the Inventory account at the beginning of a period or
added to Inventory during the year are in one of two places at the end of the
Requirement 2:
Assuming it is material, the error is corrected by restating all misstated periods
retroactively. The 2017 financial statements will present prior periods as
E2-13. Error correction
Requirement 1:
At the end of 2016, Inventory is understated by $40,000. In addition, Equipment
To understand why the balancing line of the entry is in Retained earnings,
consider how the Inventory, Equipment, and Accumulated depreciation accounts
became misstated. Amounts in the Inventory account at the beginning of a period
or added to Inventory during the year are in one of two places at the end of the
year. They have either been expensed through cost of goods sold or are in the
ending Inventory account balance. Therefore, for every dollar by which Inventory
is too low, cost of goods sold, cumulatively over the life of the firm, has been too
Requirement 2:
Assuming it is material, the error is corrected by restating all misstated periods
retroactively. The 2017 financial statements will present prior periods as
E2-14. Correction of errors
Requirement 1:
a) This error affected ending inventory in 2016 and beginning inventory in 2017.
Because inventory errors “self-correct” over a two-year period, and the 2017
financial statements have been issued, no entry is required. However, if
comparative financial statements are issued in 2018, income as presented for
b) To correct error and reflect remaining insurance at January 1, 2018:
DR Prepaid insurance $21,000
CR Retained earnings $21,000
c) To correct error and reflect equipment and accumulated depreciation:
DR Equipment $100,000
CR Retained earnings $80,000
CR Accumulated depreciation 20,000
Requirement 2:
a) This error does not affect the 2018 financial statements.
b) Insurance expense should be recorded at the rate of $12,000 per year as
the policy expires. If the error were not corrected, income in 2018 would be
c) Failure to correct this error would leave total assets understated by $60,000
at the end of 2018. ($100,000 equipment cost – $40,000 accumulated
E2-15. Preparing comprehensive income statement
JDW Corporation
Income Statement and Statement
of Comprehensive Income
For the Year Ended December 31, 2017
Sales $ 2,929,500
Cost of goods sold (1,786,995)
Gross profit 1,142,505
*$556,605 x 30% = $166,982
**$22,000 x 30% = $6,600
***$7,000 x 30% = $2,100
E2-16. Wellington International Airport Limited – Reporting asset revaluations in
OCI.
Requirement 1:
Revaluations occur when the company hires and then receives a valuation report
from a professional appraiser. The company has no current interest in selling the
land or property, plant, and equipment, so any changes in value are unrealized.
Requirement 2:
The values of land and property, plant, and equipment went up because the
Requirement 3:
U.S. GAAP does not allow for upward Revaluation of land or property, plant, and
equipment. Therefore there would be no entry observed for Revaluation in Other
Comprehensive Income.
Financial Reporting and Analysis (7th Ed.)
Chapter 2 Solutions
Accrual Accounting and Income Determination
Problems
Problems
P2-1. Preparing journal entries and statement
Requirement 1:
1/1/17: To record cash contributed by owners
3/1/17: No entry upon signing of contract
7/1/17: To record purchase of office equipment
12/31/17: To record advance-consulting fees received from Norbert Corp.
Only one year’s rent is expensed in the income statement for 2017. The
balance will be expensed in next year’s income statement.
Revenue is recognized in 2017 because Frances Corp. has fulfilled its
obligation to provide services.
To accrue salaries expense for December 2017.
Requirement 3:
Frances Corporation
Income Statement
For Year Ended December 31, 2017
Requirement 4:
Frances Corporation
Balance Sheet
December 31, 2017
Assets
Equipment $100,000
Less: Accumulated depr. 10 ,000
P2-2. Making adjusting entries and statement preparation
Requirement 1:
Before preparing the financial statements, let us re-construct the trial balance
after incorporating all the adjusting entries:
Ralph Retailers, Inc.
Adjusted Preclosing Trial Balance
As of December 31, 2017
Debit Credit
Dividends payable 20 ,000
Requirement 2:
Ralph Retailers, Inc.
Income Statement
For Year Ended December 31, 2017
Less: Operating expenses
Salaries expense $55,000
Bad debt expense 21,250
Requirement 3:
Ralph Retailers, Inc.
Balance Sheet
December 31, 2017
Assets
Accounts receivable $71,600
Less: Allowance for doubtful accounts (5 ,950)
Building 125,000
Less: Accumulated depreciation (12 ,000)
Net building 113,000
Total assets $374,350
Liabilities
Shareholders’ equity