Question

1- which of the following is an example of an accrual error?

a- failure to adjust prepaid insurance to its proper balance at year-end

b- failure to adjust inventory to its proper balance at year-end

c- failure to record depreciation at year end

d- none of the above

2- On April 1 20x0 your company finances partial payment of the sale machinery to a customer for $20,000 , 3year , 8% note receivable .interest is payable annually in April 1.on December 31 200 , and adjusting entry debits interest recievable and credit interest revenue for $1600. the entry necessary to correct the error before the books are closed would include..

a- a $400 debit to Interest Revenue

b- a $400 credit to Interest Expense

c- a $400 credit to unearned interest receivable

d- a $400 credit to sales  

Answer 1

Ans:1. The correct option for the answer is option A i.e. failure to adjust prepaid insurance to its proper balance at year-end

According to the principal of accrual , expense are recorded when they are occurred and revenues when they are earned

so with respect to accrual error the option first which is failure to adjust prepaid insurance to its proper balance at year-end was correct and other options are incorrect.

Ans:2. The correct option for the answer is option A i.e. $400 debit to interest expense

Interest amount will be => 20,000*8%9/12{from 1 April to 31 Dec)

=> 1,200

and by mistakenly recorded interest expense amount was $1,600

so to correct the entry or records the amount a reversal entry with $400 {1,600-1,200}would be debited to interest revenue to make balance nil on closure of books