EFFECTS OF ERRORS ON PROFIT

DESCRIPTION OF ERROR
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
k.
l.
m.

2014
Understated
Overstated
Overstated
No effect
Understated
Understated
No effect
Overstated
No effect
Overstated
Overstated
Understated
Overstated

2015
Overstated
Understated
Understated
No effect
Overstated
Overstated
No effect
Understated
No effect
Understated
Understated
Overstated
Understated

JOY COMPANY

Understatement of 12/31/2014 inventory

Overstatement of 12/31/2015 inventory

Understatement of 12/31/2014 depreciation expense

3-year insurance premium charged to expense in 2014
Unrecorded sale of machine in 2015
Net understatement (overstatement)

UNDERSTATEMENT (OVERSTATEMEN
PROFIT
(148,000.00)
(140,500.00)
-

(120,000.00)
75,000.00
(333,500.00)

UNDERSTATEMENT (OVERSTATEMENT) 2015

WORKING CAPITAL
RETAINED EARNINGS

(140,500.00)
(140,500.00)

(11,500.00)

120,000.00
75,000.00
54,500.00

120,000.00
75,000.00
43,000.00

TOY COMPANY

2015
210,000.00

(36,000.00)

36,000.00

(40,000.00)

40,000.00

15,000.00
301,000.00

Reported profit

Inventory overstatement at year-end, 2014

Accrued expenses not recognized at year-end,
2014
Supplies inventory not recorded ar year-end,
2015
Corrected profit

2014
295,000.00

219,000.00

BOY INC.
EFFECT ON 12/31/15 RETAINED
EARNINGS

Overstated 2014 inventory

Overstated 2014 depreciation expense
Understated 2015 inventory
Understated 2015 depreciation expense
Increase in retained earnings, 12/31/15

UNDERSTATED (OVERSTATEMENT)

12,500.00

5,000.00

(4,000.00)

13,500.00

COY COMPANY
DATE
2015
Dec. 31
a

DESCRIPTION
CORRECTING ENTRIES
OPERATING EXPENSE
PREPAID INSURANCE
RETAINED EARNINGS

FINANCIAL ASSETS THROUGH PROFIT OR LOSS

RETAINED EARNINGS
UNREALIZED GAIN ON FINANCIAL ASSETS-FVPL

c.

OPERATING EXPENSES
ALLOWANCE FOR BAD DEBTS
[(980,000*10%)-92,500]

d.

RETAINED EARNINGS
COST OF GOODS SOLD
INVENTORY

e.

MACHINE
OPERATING INCOME
ACCUMULATED DEPRECIATION- MACHINE
RETAINED EARNINGS

DEBIT

CREDIT

3,100
9,300
12,400

7,500
16,750
24,250
5,500
5,500

37,750
11,750
49,500
75,000
6,250
12,500
68,750

UNADJUSTED PROFIT
ADJUSTMENTS:
A
B
C
D
E
CORRECTED PROFIT

2014
487,500
12400
-16750
-37750
68750
445,400

2,015
550,000
(3,100)
24,250
(5,500)
(11,750)
(6,250)
547,650

SOY COMPANY

UNADJUSTED PROFIT
ADJUSTMENTS:
RENT REVENUE REVENUE FOR 2015 RECOGNIZED IN 2014
UNRECORDED OFFICE SUPPLIES INVENTORIES AT YEAR-END
UNRECORDED ACCRUED SALARIES AT YEAR-END
ACCRUED COMMISSIONS
ADJUSTED PROFIT

2014
145,000
(65,000)
(6,500)
3,700
5,500
(7,500)
(12,000)
9,000
72,200

2015
185,000
6,500
(3,700)
7,100
7,500
(4,700)
(9,000)
15,000
203,700

FELLOW COMPANY
DATE
2015
Dec. 31
a

c.

d.

DESCRIPTION
CORRECTING ENTRIES

DEBIT

EQUIPMENT
OPERATING INCOME

120,000

PROFIT FOR SELF-CONSTRUCTION

WAREHOUSE

500,000

DEPRECIATION EXPENSE
ACCUMULATED DEPRECIATION-MACHINE

CASH
ACCUMULATED DEPRECIATION-MACHINE
GAIN ON SALE OF MACHINE
MACHINE

CREDIT

120,000

500,000

20,000
20,000

60,000
150,000
30,000
180,000

DOY CORPORATION

INITIAL AMOUNTS
ADJUSTMENTS: INCREASE(DECREASE)
1
2
3
4
5
6
7
8
ADJUSTED AMOUNTS

INVENTORY
1,750,000

50,000
20,000
26,000
25,000
30,000
2,000
1,903,000

ACCOUNTS PAYABLE
1,200,000

NET SALES
8,500,000
(35,000)

50,000
(40,000)

60,000
4,000
1,314,000

8,425,000

(1) Schedule to correct the reported profit

Reported profit (loss)
Nature of errors:
a.
Failed to record accrued expenses.

b.

Overstated ending inventories.

c.

Failed to record accrued interest on notes

receivable.

d.

Failed to recognize unearned rent.

e.

Failed to record purchases on account, purchases

were recorded when paid in the subsequent year,
merchandise properly included in end inventory.
Repairs and maintenance incurred during the year
capitalized as part of asset cost. Full year
depreciation at an annual rate of 10% is provided
in the year that the asset is recognized.
Failed to recognize prepaid insurance at year end.

f.

g.

CORRECTED PROFIT

2013
490,000
(34,000)

(63,000)

12,000

(24,000)

4,800

385,800

2014
670,000
34,000
(28,000)
63,000
(28,000)
(12,000)
6,000
24,000
(20,000)

No effect

2015
(320,000)

DATE
2014
DEC 31
a

RETAINED EARNINGS

RETAINED EARNINGS

INTEREST RECEIVABLE
INTEREST REVENUE

RETAINED EARNINGS

COST OF SALES

OPERATING EXPENSES
ACCUMULATED DEPRECIATION

PREPAID INSURANCE

28,000
(43,000)
28,000
(36,000)
(6,000)
8,000
20,000
18,000
No effect

(120,000)
(80,000)
(4,800)
6,200
590,400

(6,200)
7,800
(381,400)

DESCRIPTION
CLOSING ENTRIES

DEBIT

RETAINED EARNINGS
ACCRUED ACCOUNTS PAYABLE
OPERATING EXPENSE

34,000

RETAINED EARNINGS
INVENTORIES
COST OF SALES

63,000

INTEREST RECEIVABLE
INTEREST REVENUE
RETAINED EARNINGS

28,000
4,000

28,000
35,000
6,000
6,000
12,000

RETAINED EARNINGS
UNEARNED RENT
RENT REVENUE

24,000

COST OF SALES
ACCOUNTS PAYABLE

25,000

OPERATING EXPENSES
ACCUMULATED DEPRECIATION
CAPITALIZED ASSET
PREPAID INSURANCE
OPERATING EXPENSE
RETAINED EARNINGS

CREDIT

20,000
4,000

25,000
108,000
12,000
120,000
6,200
1,400
4,800