Source of Questions

Chapter 7 Correction of Errors (II): Errors Affecting Trial Balance Agreement

QUESTION 1

Tom Tong runs a stationery business. The trial balance as at 31 December 2010 did not agree. Mr Tong opened a suspense account to record the trial balance difference. The draft net profit for the year amounted to $88,888. The following errors were subsequently found:

(i)Drawings of $10,000 by cheque and $5,000 worth of goods in December 2010 had both been omitted from the books.

(ii)A payment of $11,200 by cheque to settle the account of a trade creditor, Paul Ho, had been posted to Paul Hung’s account as $11,020.

(iii)Rates of $7,600 paid in October 2010 were entered in the cash book, but no entry had been made in the rates account.

(iv)The total of the purchases day book had been entered in the purchases account as $38,838 instead of the correct figure of $38,388.

(v)Purchases of office stationery for resale amounting to $380 had been debited to the purchases account.

(vi)Discounts allowed for the month of November 2010 amounting to $1,600 had been posted to the credit side of the discounts received account.

(vii)An amount of $3,000 owed by Mr Yu had been written off as a bad debt in the previous year. Half of the amount was recovered on 30 October 2010. No entry had been made in the books.

(viii)A debit note from Smith Limited for $880 had been wrongly entered in the returns outwards journal as $1,080 and correctly entered in Smith Limited’s account.

(ix)A second-hand motor vehicle was purchased for $10,000 on 1 December 2010. Two days later, it was sold for half the price because it was defective. The sale proceeds of the motor vehicle were only posted to the returns outwards journal. No other entries had been made.

(x)On 1 August 2010, a fire broke out at Tom’s warehouse and inventory costing $50,000 was destroyed. Although the insurance company paid $34,000 by cheque to settle the claim, no entry in respect of the compensation received had been made by the company as at 31 December 2010.

Required:

(a) Prepare journal entries in Tom Tong’s books, including narrations, to correct the above errors.

(17.5 marks)

(b) Calculate the revised net profit for the year ended 31 December 2010.(5.5 marks)

(Calculations to the nearest dollar)

Answer:

(a)

(b)

QUESTION 2

William Lau is a sole trader. His junior accounts clerk prepared the draft balance sheet below for him:

Subsequently, the accountant found the following errors:

(i)A purchase invoice for $500 was correctly entered in the purchases journal, but was debited to the trade creditor’s account as $5,000.

(ii)Machinery costing $21,000 was sold for $8,000 by cheque. The machinery had an accumulated depreciation of $10,000. This transaction had not been recorded.

(iii)The inventory as at 31 December 2011 was undercast by $2,700.

(iv)William took cash amounting to $1,000 for his holiday expenses. The accounts clerk recorded only the cash withdrawn. No other entry was made.

(v)In November 2011, the business bought goods on credit from Y Y Ltd for $2,560. Y Y Ltd also owed the business $3,000. These transactions were correctly recorded in the accounts. The two accounts of
Y Y Ltd were to be settled by a contra entry on 31 December 2011.

(vi)A trade debtor, Alan Au, was declared bankrupt during the year. The business immediately wrote off his debts of $1,920. However, in November 2011, Alan repaid his debts by cheque. The accounts clerk did not make any entry for the repayment in the books.

(vii)Goods costing $5,000 were stolen. As compensation, the insurance company paid for half of the inventory lost by cheque. No entry was made for the compensation received.

(viii)An electricity bill for $500 was received but was not paid until February 2012. No entry in respect of the bill was made in the books at the year end.

Required:

Prepare the following:

(a)Journal entries to correct the above errors (narrations are not required)(10 marks)

(b)Suspense account(1.5 marks)

(c)Statement to calculate the revised net profit(3.5 marks)

(d)Revised balance sheet (in vertical form)(9 marks)

Answer:

(a)

(b)

Suspense

(c)

(d)

Workings:

(W1)$87,000  $21,000 = $66,000

(W2)$26,700  $10,000 = $16,700

QUESTION 3

The trial balance of Wang Tai Enterprise as at 31 December 2010 failed to agree and the difference was credited to a suspense account. The draft net profit for the year amounted to $206,740.

Subsequent checking of the records revealed the following:

(i)A debt of $1,100 owed by Hang Lung Ltd proved to be irrecoverable but no record was entered in the books. The existing allowance for doubtful accounts, $1,600, should have been adjusted to 3% of accounts receivable. Accounts receivable as at 31 December 2010 amounted to $76,400.

(ii)A van costing $156,000 was acquired on 1 October 2010 for business use. This amount was debited to the purchases account. The firm’s policy is to depreciate vans at 20% per annum on cost.

(iii)Salaries and wages were overcast by $1,740.

(iv)Carriage inwards of $560 was wrongly credited to the carriage outwards account.

(v)A piece of equipment costing $30,000 was sold during the year. However, the sale proceeds of $7,200 were credited to the sales account and no other entries were made. The net book value of the equipment was $8,140.

(vi)An electricity accrual of $4,750 was wrongly adjusted at the year end as a prepayment.

(vii)The closing inventory was undervalued by $750.

(viii)The firm sold goods with a list price of $9,100 to Formal Co with a 15% trade discount. It also granted a 7.5% cash discount to Formal Co for the early settlement of its debt. However, $9,100 was recorded in the books and no entry was made for the cash discount.

(ix)A credit purchase of $6,240 was correctly entered in the trade creditor’s account but was entered in the purchases account as $6,420.

(x)The returns outwards journal was overcast by $710.

Required:

(a)Prepare the necessary journal entries to correct the above errors. (Narrations are not required.)

(16.5 marks)

(b)Draw up the suspense account.(3 marks)

(c)Prepare a statement to correct the draft net profit for the year ended 31 December 2010.(8.5 marks)

(Calculations to the nearest dollar)

Answer:

(a)

(b)

Suspense

(c)

QUESTION 4

Paul Shum operates a business that sells aquarium equipment. The bookkeeper prepared a trial balance as at 31 March 2010:

Additional information:

(i)Inventory as at 3l March 2010 was valued at $253,233.

(ii)A bad debt of $1,300, which was written off in May 2009, was recovered. The cheque was received on 10 January 2010. No entry had yet been made in respect of this transaction.

(iii)The allowance for doubtful accounts was to be maintained at 5% of accounts receivable.

(iv)Depreciation was to be charged as follows:

Office equipment — 10% per annum on cost

Furniture and fittings — 20% per annum on net book value

(v)The following adjustments were to be made on 31 March 2010:

Accrued rent and rates$1,650

Accrued carriage inwards $125

Prepaid wages $1,290

(vi)Errors that caused the suspense account balance were as follows:

1A trade debtor’s balance of $2,200 had been entered twice in the accounts receivable ledger.

2Office expenses had been overcast by $800.

3Carriage inwards had been overcast by $30.

4Sales of $1,400 had been correctly entered in the sales account but had been entered in the trade debtor’s account as $1,500.

Required:

(a)Show the journal entries required to correct the above errors. (Narrations are not required.)(4 marks)

(b)Prepare a corrected trial balance as at 31 March 2010.(10 marks)

(c)Draw up an income statement for Paul Shum's business for the year ended 31 March 2010.(9 marks)

(d)Draw up a balance sheet as at the same date.(7 marks)

Answer:

(a)

(b)

(c)

Paul Shum

Balance Sheet as at 31 March 2010

QUESTION 5

Johnny Chan, the accountant at Marco Computer Software Enterprise, prepared draft financial statements for the year ended 31 March 2011. After the trial balance had been prepared, he discovered that the trial balance did not agree and showed a debit shortfall of $55,200. The draft net loss for the year amounted to $6,530.

The following errors were found after investigation:

(i)Five new computers costing $50,000 had been recorded in the purchases account. These computers were used to replace the firm’s old computers. The computers were to be depreciated at a rate of 30% per annum on cost. A full year of depreciation was to be charged in the year of purchase.

(ii)A trade debtor settled his outstanding balance of $4,870 by cheque. However, it had been recorded in the cash book as $4,800.

(iii)Closing inventory had been under-counted by 500 units. Each unit cost $5.

(iv)Credit sales of $28,000 had been credited to both the sales account and a trade creditor’s account.

(v)The owner used the business bank account to issue a cheque to pay for his son’s annual insurance premium of $1,230. This amount had been debited to the insurance account and credited to the cash book.

(vi)An employee’s salary of $8,000, which was paid by cheque, had been omitted from the books.

(vii)A trade debtor had $8,750 that had been outstanding for six months. After investigation, this amount was cancelled as no job has been done for this trade debtor. No entry had been made for the job cancellation.

(viii)A discount allowed of $540 was debited to the returns inwards account.

(ix)Goods returned by a trade debtor amounting to $870 had been recorded in the returns inwards account only.

(x)Cash of $38,000 deposited into the bank had been recorded in the cash book as $38,800.

Required:

(a)Prepare the journal entries to correct the above errors. (Narrations are not required.)(11.5 marks)

(b)Prepare a statement to correct the draft net loss for the year ended 31 March 2011.(4 marks)

(c)Draw up the suspense account.(2.5 marks)

Answer:

(a)

(b)

(c)

Suspense

QUESTION 6

Eddy Tsui, the owner of Runner Sport Enterprise, is reviewing the draft final accounts for May 2010. He discovered that the bank account had an overdraft balance, but the bank statement showed a positive balance as at 31 May 2010.

Required:

(a)Assume that the bank account in the ledger has been updated and that no errors were made in the entries. Explain to Eddy why the bank statement balance and the ledger bank account balance may not agree on the same day. (2 marks)

On 31 May 2010, the bank current account balance was $34,210 (overdraft) and the bank statement balance was $11,983. In addition, the trial balance did not agree. A suspense account was opened with a credit balance of $1,778. The net profit shown in the draft profit and loss account was $42,130.

Subsequently, you found the following:

(i)The payment to a trade creditor of $3,204 had been recorded in the trade creditor’s account correctly but two payment entries were made in the bank account.

(ii)A discount allowed was wrongly recorded in the cash book as $24 instead of $42.

(iii)Rent of $100,000 was paid by cheque on 30 May 2010. The cheque was presented for payment on
6 June 2010.

(iv)An insurance premium payment of $39,450 was made from the bank account through autopay on
27 May 2010. No entry was made in the books.

(v)Cheques from trade debtors were deposited into the bank in May but were not shown in the May 2010 bank statement. They were:

Jacky Sports House $6,843

Martin Outlet $2,333

(vi)A cheque for $8,230 received from Fortune Sports Shop was dishonoured. No record was made in the books.

(vii)A cheque for $67,300 was received from Sky Shop. Entries had been made in the books, but the cheque was dated 1 September 2010.

(viii)Petty cash of $5,000 was withdrawn from the bank. An entry was made in the petty cash book only.

(ix)Credit purchases of $64,240 from Mary Sports Co were debited to the purchases account and credited to the bank account.