Exercise 20-23 Error correction; three errors [LO20-6] Below are three independent and unrelated errors. On December 31, 2017, Wolfe-Bache Corporation failed to accrue office supplies expense of $2,200. In January 2018, when it received the bill from its supplier, Wolfe-Bache made the following entry: Office supplies expense2,200 Cash 2,200 On the last day of 2017, Midwest Importers received a $98,000 prepayment from a tenant for 2018 rent of a building. Midwest recorded the receipt as rent revenue. At the end of 2017, Dinkins-Lowery Corporation failed to accrue interest of $8,800 on a note receivable. At the beginning of 2018, when the company received the cash, it was recorded as interest revenue. Required: For each error: 1. What would be the effect of each error on the income statement and the balance sheet in the 2017 financial statements

Effect of Errors on Income Statement and Balance Sheet for 2017:

Wolfe-Bache Corporation -

Unaccrued office supplies expense of $2,200:

Income Statement: The net income was overstated by $2,200.

Balance Sheet: Current Liabilities were understated by $2,200 and Retained Earnings overstated by $2,200.

Midwest Importers -

Rent Revenue Prepaid for 2018 recorded as rent revenue by $98,000:

Income Statement: The net income was overstated by $98,000.

Balance Sheet: Current Liabilities were understated by $98,000 and Retained Earnings overstated by $98,000.

Dinkins-Lowery Corporation -

Un-accrued Interest on Note Receivable of $8,800:

Income Statement: The net income was understated by $8,800.

Balance Sheet: Current Assets were understated by $8,800 and Retained Earnings understated by $8,800.

Explanation:

a) Unaccrued office supplies expense of $2,200:

This expense pertains to 2017 and as a result should be recognized in 2017 and not 2018 when cash was paid.

The entries to recognize the expense in 2017, when financial statements are being prepared, would be to debit Office Supplies Expenses with $2,200 and credit Office Supplies Expense Payable with $2,200.

When payment is effected in January, Office Supplies Expense Payable would be debited and Cash credited with $2,200.

These entries would be in according with the accrual concepts and matching principles of accounting.

b) Rent Revenue Prepaid for 2018 recorded as rent revenue by $98,000:

This rent revenue should have entered with a debit to Cash and a credit to Rent Revenue in Advance of $98,000 in accordance with the accrual concepts and matching principle.

c) Un-accrued Interest on Note Receivable of $8,800:

The Interest on Note Receivable is an income recognizable in 2017 when financial statements are being prepared in accordance with the accrual concepts and matching principles of accounting.

The entries to recognize the revenue would have been to credit Interest on Note Receivable and debit Accrued Interest Receivable with $8,800.

The accrual concepts state that all expenses and revenue pertaining to a period should be recognized in that period when the expenses were incurred and when revenue was earned.

The matching principle implies that expenses and revenue for a period should be matched to each other and not matched to another period's expense or revenue.