Question

1)Beta purchased an insurance policy on 1/1/15 and paid a five-year premium for $200,000. The full purchase price was recorded immediately as Insurance Expense. The error was discovered on 1/1/18. Prepare the J.E. that would correct assets and retained earnings as of 1/1/18.

2)In April, 2016, Gamma sold securities for $86,000. It had originally purchased these securities for $45,000. By mistake, Gamma debited cash and credited investments for $86,000. The error was caught the following day (before books closed). Prepare the J.E. that would correct this error without having to reverse the original journal entry.

3)Beta discovered ending inventory errors in 2015 and 2016. The 2015 ending inventory was overstated by $205,000 whereas the 2016 ending inventory was understated by $75,000. Ignoring taxes, by what amount should the beginning retained earnings be adjusted on January 1, 2017?

Answer 1

Journal entries.

1. Prepaid insurance expenses a/c...................dr 160000

To insurance expense a/c 160000

(Bing insurance expenses paid advance)

2. Cash a/c ........................dr 86000

To securities a/c . 86000

(Bank security sold for cash of 86,00)

Securities a/c.................dr 41000

To profit on sale of securities a/c 41000

(Being profit on sale of securities recognised in books of accounts).

3.on January 1 2017 the retained earnings are adjusted with the 130000

Because of inventory stated in 2015 by 205000 that I want to be reduced from the retained earnings of 2017.

The inventory was understated in 2016 by 75000 so that I want to be added to the retained earnings in 2017.

Effect of the about two statements gives adjustment of 130000 reduction in retained earnings .

These are all the journal entries and explanations required to solve the above given questions.

I hope, all the above given points, entries and explanations are useful and helpful to you.

Thank you.