KEW Enterprises began operations in January 20X1 to manufacture a hand sanitizer that promised to be more effective and gentler on the skin than existing products. Family members, one of whom was delegated to be the office manager and bookkeeper, staffed the company. Although conscientious, the office manager lacked formal accounting training, which became apparent when the growing company was forced in March 20X4 to hire a CPA as controller. Although ostensibly brought in to relieve some of the office manager’s stress, management made it clear to the new controller that they had some concerns about the quality of information they were receiving. Accordingly, the controller made it a priority to review the records of prior years, looking for ways to improve the accounting system. From this review, the following errors were uncovered. The office manager expensed rent on equipment and facilities when paid. Amounts paid in 20X1, 20X2, and 20X3 that represented rent for the subsequent year were $5,000, $4,500, and $4,900, respectively.No adjusting entries were ever made to reflect accrued salaries. The amounts that should have been presented as accrued wages at December 31, 20X1, 20X2, and 20X3, respectively, were $12,000, $13,500, and $8,300.Errors occurred in the depreciation calculations that resulted in depreciation expense being overstated by $3,500 in 20X1, understated by $7,000 in 20X2, and understated by $6,000 in 20X3.In February 20X3 some surplus production equipment that originally had cost $14,000 was sold for $4,000; $12,000 in depreciation had correctly been taken on this equipment. The office manager made this entry to record the sale: To record sale of surplus equipmentCashAccumulated depreciationEquipmentDescriptionReported incomeItem 1Required:Complete the worksheet shown below to assist in preparing the correcting entry. Ignore income taxes. (By way of example, the firstrequired entry on the worksheet has been made.) (Negative amounts should be indicated by a minus sign. If there is one errorselect "Counterbalancing error" and if there are no errors select "No correction needed" in the Dr. Account column.)Prepaid rent-20X1Prepaid rent-20X2Prepaid rent-20X3Item 2.Accrued wages-20X1Accrued wages-20X2Accrued wages-20X3Item 3.DepreciationItem 4Gain on machineryAdjusted income$20X1(24,000) $5,0003,500$ 4,00010,000$ 14,000Effect on income20X2(15,500) $43,000 $(5,000)Error Corrections Worksheet12,00020X340.000Dr. AccountCounterbalancing errorCounterbalancing error4,900 Prepaid rent50,000 $ 58,400Counterbalancing error13,500 Counterbalancing errorRetained earningsRetained earningsAccumulated depreciationAccounts to be adjustedAmount$Cr. Account4,900 Retained earningsAccrued wagesAccumulated depreciationGain on sale$Amount4,900

KEW Enterprises began operations in January 20X1 to manufacture a hand sanitizer that promised to be more effective and gentler on the skin than existing products. Family members, one of whom was delegated to be the office manager and bookkeeper, staffed the company. Although conscientious, the office manager lacked formal accounting training, which became apparent when the growing company was forced in March 20X4 to hire a CPA as controller. Although ostensibly brought in to relieve some of the office manager’s stress, management made it clear to the new controller that they had some concerns about the quality of information they were receiving. Accordingly, the controller made it a priority to review the records of prior years, looking for ways to improve the accounting system. From this review, the following errors were uncovered. The office manager expensed rent on equipment and facilities when paid. Amounts paid in 20X1, 20X2, and 20X3 that represented rent for the subsequent year were $5,000, $4,500, and $4,900, respectively. No adjusting entries were ever made to reflect accrued salaries. The amounts that should have been presented as accrued wages at December 31, 20X1, 20X2, and 20X3, respectively, were $12,000, $13,500, and $8,300. E

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

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KEW Enterprises began operations in January 20X1 to manufacture a hand sanitizer that promised to be more effective and gentler on the skin than existing products. Family members, one of whom was delegated to be the office manager and bookkeeper, staffed the company. Although conscientious, the office manager lacked formal accounting training, which became apparent when the growing company was forced in March 20X4 to hire a CPA as controller. Although ostensibly brought in to relieve some of the office manager’s stress, management made it clear to the new controller that they had some concerns about the quality of information they were receiving. Accordingly, the controller made it a priority to review the records of prior years, looking for ways to improve the accounting system. From this review, the following errors were uncovered.

The office manager expensed rent on equipment and facilities when paid. Amounts paid in 20X1, 20X2, and 20X3 that represented rent for the subsequent year were $5,000, $4,500, and $4,900, respectively.
No adjusting entries were ever made to reflect accrued salaries. The amounts that should have been presented as accrued wages at December 31, 20X1, 20X2, and 20X3, respectively, were $12,000, $13,500, and $8,300.
Errors occurred in the depreciation calculations that resulted in depreciation expense being overstated by $3,500 in 20X1, understated by $7,000 in 20X2, and understated by $6,000 in 20X3.
In February 20X3 some surplus production equipment that originally had cost $14,000 was sold for $4,000; $12,000 in depreciation had correctly been taken on this equipment. The office manager made this entry to record the sale:

To record sale of surplus equipment
Cash
Accumulated depreciation
Equipment
Description
Reported income
Item 1
Required:
Complete the worksheet shown below to assist in preparing the correcting entry. Ignore income taxes. (By way of example, the first
required entry on the worksheet has been made.) (Negative amounts should be indicated by a minus sign. If there is one error
select "Counterbalancing error" and if there are no errors select "No correction needed" in the Dr. Account column.)
Prepaid rent-20X1
Prepaid rent-20X2
Prepaid rent-20X3
Item 2.
Accrued wages-20X1
Accrued wages-20X2
Accrued wages-20X3
Item 3.
Depreciation
Item 4
Gain on machinery
Adjusted income
$
20X1
(24,000) $
5,000
3,500
$ 4,000
10,000
$ 14,000
Effect on income
20X2
(15,500) $
43,000 $
(5,000)
Error Corrections Worksheet
12,000
20X3
40.000
Dr. Account
Counterbalancing error
Counterbalancing error
4,900 Prepaid rent
50,000 $ 58,400
Counterbalancing error
13,500 Counterbalancing error
Retained earnings
Retained earnings
Accumulated depreciation
Accounts to be adjusted
Amount
$
Cr. Account
4,900 Retained earnings
Accrued wages
Accumulated depreciation
Gain on sale
$
Amount
4,900

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