Question

The ledger of Pharoah Limited at October 31, 2021, contains the following summary data:

Cash dividends—common
$121,000
Common shares
646,000
Depreciation expense
93,000
Service revenue
1,467,000
Operating expenses
927,000
Interest expense
56,000
Retained earnings, November 1, 2020
571,000

Your analysis reveals the following additional information:

1.
The company has a 25% income tax rate.
2.
On March 19, 2021, Pharoah discovered an error made in the previous fiscal year. A $57,000 payment of a note payable had been recorded as interest expense.
3.
On April 10, 2021, common shares costing $77,000 were reacquired for $101,000. This is the first time the company has reacquired common shares.

part
(a)
Prepare a journal entry to correct the prior period error.

Answer 1

Journal Entry to correct the prior period error.

Notes payable A/c Dr. $57,000

Equity A/c Dr. $57,000

(Being journal entry to be passed for correction of prior period error)

In order to correct prior period error, $57,000 will be recorded in reserve and surplus balance as credit. Since last year profit reduced by $57,000 on account of an error. And notes payable will debited by similar amount.

Proper disclosure needs to be given in the financial statements in accordance with IAS 8.