Question

BCD Corporation paid $144,000 for a 3 year lease on May 31, 2019 and debited a nominal account when recording the payment. No correcting or adjusting entry was ever recorded.

What is the error in the 2020 financial statements?

		Assets: NE Liab: O 68,000 NI: O 48,000 SHE: U 68,000
		Assets: U 20,000 Liab: NE NI: O 48,000 SHE: U 20,000
		Assets: O 76,000 Liab: NE NI: O 48,000 SHE: O 76,000
		None of the other answer choices is correct.
		Assets: U 116,000 Liab: NE NI: U 116,000 SHE: U 116,000
		Assets: U 68,000 Liab: NE NI: U 68,000 SHE: U 68,000
		Assets: U 68,000 Liab: NE NI: O 48,000 SHE: U 68,000

Answer 1

total expenses debitted to statement of profit and loss in the year 2019 = $144,000

However, total amount that should have been debitted = $144000/36*7 = $28000

This opening retained earning is under valued by= $144000 - $28000 = $116000

Also in the year 2020, statement of Profit and loss should have been debitted by $48000 however it was not debitted by any amount. Thus, net Income for 2020 is overvalued by $48000

Thus net effect on closing retained earning as at Dec 2020 = $116000 -48000 = Undervalued by $68000

Also at the end of 2020, the asset should have = $144000 - $28000 - $48000 = $68000 however the asset is valued at $0 thus asset is undervalued by $68000

Thus the answer would be:

Assets: U 68,000
Liab: NE
NI: O 48,000
SHE: U 68,000

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