Question

In 2009, accrued advertising expense of $7,500 was incorrectly recorded as $9,000

A. show the correction for this error if it was discovered in 2009

B. show the effect of the error on the 2009 income statement if the error is not discovered until 2010

C. show the effect of the error on the 2009 balance sheet if it is not discovered until 2010

Answer 1

A. If accrued advertising expense is inflated by $1500, it would inflate expense by $1500 and profit would decrease by $1500. Correction of this error would be reducing advertising expense and accrued advertising expense by $1500. The entry would be:

Accrued advertising expense Dr $1500

To Advertising expense $1500

B. If the error is not discovered until 2010, expense would have been inflated by $1500 hence net profit would havebeen deflated by $1500.

C. In balance sheet, net profit carried to retained earnings would have been understated by $1500. On the other hand, accrued advertising expense, a liability, would have been overstated by $1500