Question

Bettner, Inc., is a calendar year corporation whose financial statements for 2015 and 2016 included errors as follows:
Year Ending Inventory Depreciation Expense
2015 $ 12,000 overstated $ 22,300 overstated
2016 8,000 understated 6,000 understated
Assume that inventory purchases were recorded correctly and that no correcting entries were made at December 31, 2015, or December 31, 2016. The errors were discovered in 2017, after the 2016 financial statements were issued.
Required:
Ignoring income taxes, prepare the journal entry Bettner would make in 2017 to correct the errors.

Answer 1

Answer:

i. For the Understatement of Inventory - Rectification

Journal Entry                            Debit        Credit

Inventory A/c                            $8,000

To Profit and loss adjustment a/c            $8,000

ii. To Rectify overstatement of Depreciation Expense

Journal Entry                                 Debit       Credit

Profit and loss adjustment A/c   $16,300

To Depreciation Expense                            $16,300

(22,300 - 6,000)