Question

You have been assigned to examine the financial statement of SPD Company for the year 2015. You discovered the following situations :

       a.    In October, 2013 the company sold goods $4,600 on credit. This revenue was mistakenly recorded as debit cash and credit sales $6,400 (All cash received in 2014).

        b. On Dec 31, 2014 the company forgot to adjust accrued interest $1,200 from notes payable. (Interest Expense was recorded when it paid during 2015).

Required :    (Ignore income tax consideration)

Prepare adjusting or correcting entries on December 31, 2015:

Answer 1

All the item are prior period item .

a) In 1st situation excess cash and revenue being book, as cash is recoverd in 2014 hence the account payable effect is already become nil . hence only the excess amount again cash and sales is to be reverse.

As the above adjustment are prior period item , sales was transfered to Retained earnings at the closing date hence the adjustment entry will reduce ratained earning and Cash balance.

Adjusting entry

December 31,2015	Debit	Credit
Retained Earnings	1800
To Cash		1800
(Being excess Revenue recognise in 2013, due to transposition error)

b) No Adjusting entry is required to Note Payable as note payable are recorded at Principle amount and for accrued interest saperate entry to be made by Interest expense debit to Interest payable, and on payment interest payable will get debit by crediting cash .

As In 2015 , expenses is book again prior period expense , this entry is to be reverse , as per accrual only expenses for the year for which it incurred is to be book.

As Retained earning is overstated in Last year 2014 because of less expense booked , hence the above Interest expense which is charged to 2015 interest expense will be adjusted against retained earnings

Dec 31, 2015	Debit	Credit
Retained Earnings	$1200
To Interest Expenses		$1200
Being prior period interest expenses wrongly recognised as expense