Chapter 3, Problem 31BP

a.

To determine

Identify the errors that would cause a difference in the total amounts of debits and credits in a trial balance, and also indicate whether debit or credit column would be larger as a result of the error.

Explanation of Solution

Errors:

An error is a mistake committed in the process of book-keeping or in accounting.  In some cases, errors may be committed but, they will not affect the totals of the trial balance. Such error can be detected while preparing the trial balance or would be indicated by the unusual account balance.

Identify the errors that would cause a difference in the total amounts of debits and credits in a trial balance, and also indicate whether debit or credit column would be larger as a result of the error as follows:

1. Purchase of land in cash is wrongly recorded as a $5,000 debit to land account:

In this case, the land account is debited by $5,000 instead of $3,000, and it increases the value of assets account by $2,000. Hence, it increases the debit column of trial balance by $2,000.

2. Purchase of supplies on account is wrongly credited in the cash account:

In this case, the cash is credited by $1,600, and it decreases the value of assets account, and liabilities account. Hence, debit and credit column of trial balance would be equal.

3. Service provided of $7,800on account is wrongly recorded as $8,700:

In this case, the cash account is debited with $8,700 instead of $7,800, and service revenue is credited with $8,700 instead of $7,800. Hence, it increases the both assets and stockholder’s equity. Hence, debit and credit column of trial balance would be equal.

4. Cash received from customer is not recorded:

In this case, cash received from customer is not recorded, and accounts receivable increases the value of assets, and cash decreases the value of assets account. Hence, there is no effect in the assets account. Therefore, debit and credit column of trial balance would be equal.

5. Cash paid to creditor is not recorded:

In this case, cash paid to creditor is not recorded, hence it increases (cash) the value of assets, and increases (accounts payable) the value of liabilities. Therefore, debit and credit column of trial balance would be equal.

6. Incurred utilities expense on account is not recorded:

In this case, utilities expense incurred on account is not recorded, hence it decreases the value of liabilities (accounts payable), and increases the value of stockholder’s equity. Therefore, debit and credit column of trial balance would be equal.

b.

To determine

Indicate whether given errors would overstate, understate, or have not effect on the amount of total assets, liabilities and stockholder’s equity.

Explanation of Solution

Indicate whether given errors would overstate, understate, or have not effect on the amount of total assets, liabilities and stockholder’s equity as follows:

Event	Assets	=	Liabilities	+	Stockholder's Equity
1	Overstate		No Effect		No Effect
2	Understate		Understate		No Effect
3	Overstate		No Effect		Overstate
4	No Effect		No Effect		No Effect
5	Overstate		Overstate		No Effect
6	No Effect		Understate		Overstate

Table (1)

1. Purchase of land in cash is wrongly recorded as a $5,000 debit to land account:

In this case, the land account is debited by $5,000 instead of $3,000, and it increases the value of assets account by $2,000$\left(\$5,000-\$3,000\right)$. In order to rectify the error, the amount of $2,000 is added to the land account, and the amount of $3,000 is deducted from the land account.

2. Purchase of supplies on account is wrongly credited in the cash account:

In this case, the cash is credited by $1,600, and it decreases the value of assets account, and liabilities account. In order to rectify the error, cash account is debited with $1,600, and accounts payable account is credited with $1,600.

3. Service provided of $7,800on account is wrongly recorded as $8,700:

In this case, the cash account is debited with $8,700 instead of $7,800, and service revenue is credited with $8,700 instead of $7,800. Hence, it increases the both assets and stockholder’s equity. In order to rectify the error, the amount of $900 $\left(\$8,700-\$7,800\right)$ is deducted from cash and service revenue account.

4. Cash received from customer is not recorded:

In this case, cash received from customer is not recorded, and accounts receivable increases the value of assets, and cash decreases the value of assets account. Hence, there is no effect in the assets account. In order to rectify the error, debit the cash account by $1,200, and credit the service revenue account by $1,200.

5. Cash paid to creditor is not recorded:

In this case, cash paid to creditor is not recorded, hence it increases (cash) the value of assets, and increases (accounts payable) the value of liabilities. In order to rectify the error, debit accounts payable account by $800 and credit cash account by $800.

6. Incurred utilities expense on account is not recorded:

In this case, utilities expense incurred on account is not recorded, hence it decreases the value of liabilities (accounts payable), and increases the value of stockholder’s equity. In order to rectify the error, debit the utilities expense account by $1,050 and credit cash account by $1,050.

c.

To determine

Prepare the corrected trial balance for Company K.

Explanation of Solution

Trial balance:

Trial balance is the summary of accounts, and their debit and credit balances at a given point of time. It is usually prepared at end of the accounting period. Debit balances are listed in left column and credit balances are listed in right column. The totals of debit and credit column should be equal. Trial balance is useful in the preparation of the financial statements.

Prepare the corrected trial balance for Company K as follows:

Company K
Trial balance
May 31, 2016
Accounts	Debit ($)	Credit ($)
Cash (1)	9,200
Accounts Receivable (2)	900
Supplies	420
Prepaid Insurance	2,400
Land (3)	3,000
Accounts Payable (4)		3,350
Common Stock		1,800
Retained Earnings		7,390
Dividends	400
Service Revenue (5)		19,930
Rent Expense	3,600
Salaries Expense	9,000
Operating Expenses	2,500
Utilities Expense (6)	1,050
Total	32,470	32,470

Table (2)

Therefore, the total of debit, and credit columns of a corrected trial balance is $32,470 and agree.

Working note:

Calculate the correct value of cash account

$\begin{array}{c}\text{Corrected cash balance = }\left(\begin{array}{l}\text{Amount of cash in trial balance + }\\ \text{Supplies wrongly debited in cash +}\\ \text{Cash receipts from cusotmer}-\\ \text{Incorrect amount debited}\end{array}\right)\\ \text{=\$7,200+}\$1,600\text{+\$1,200}-\$800\\ \text{=\$9,200}\end{array}$ (1)

Calculate the correct value of accounts receivable

$\begin{array}{c}\text{Corrected accounts receivable = }\left(\begin{array}{l}\text{Amount of accounts receivable in trial balance}-\\ \text{Amount credit in accounts receivable}-\\ \text{Amount credited}\end{array}\right)\\ \text{=\$3,000}-\$900-\$1,200\\ =\$900\end{array}$ (2)

Calculate the correct value of land:

$\begin{array}{c}\text{Corrected value of land = }\left(\begin{array}{l}\text{Amount of land in trial balance}-\\ \text{Amount wrongly debited in land }\end{array}\right)\\ \text{=\$5,000}-\$2,000\\ =\$3,000\end{array}$ (3)

Calculate the correct value of accounts payable

$\begin{array}{c}\text{Corrected accounts payable = }\left(\begin{array}{l}\text{Accounts payable in trial balance +}\\ \text{Supplies purchased on account + }\\ \text{Utilities expens incurred on account}-\\ \text{Wronlgy credited amount}\end{array}\right)\\ =\$1,500+\$1,600+\$1,050-\$800\\ =\$3,350\end{array}$ (4)

Calculate the correct value of service revenue

$\begin{array}{c}\text{Corrected service revenue = }\left(\begin{array}{l}\text{Amount of service revenue in trial balance }-\\ \text{Amount wrongly credited}\end{array}\right)\\ \text{=\$20,830}-\text{\$900}\\ \text{=\$19,930}\end{array}$ (5)

Calculate the correct value of utilities expense

$\begin{array}{c}\text{Corrected utilities expense = }\left(\begin{array}{c}\text{Amount of utilities expense in trial balance + }\\ \text{Utilities expense incurred}\end{array}\right)\\ \text{=\$0 + \$1,050}\\ \text{=\$1,050}\end{array}$ (6)