FA – Nov 2014 – L1 – SB – Q2 – Correction of Errors

Preparing journal entries, suspense account, and net profit adjustment based on detected errors.

Question

The Accounts Officer of Endwell & Co was unable to agree the trial balance. The difference of N175,200 was placed on the debit side of a suspense account. After a careful review of the accounting entries in Endwell & Co’s books, the following errors were detected:

i. A sum of N120,000 representing credit sales to a customer was posted to the credit of his account.
ii. A cheque of N30,000 paid into the bank was later dishonoured, but the customer’s account was debited with N3,000.
iii. The Purchase Day Book was overcast by N18,000.
iv. The debit side of a supplier’s account was overcast by N60,000.
v. The returns inwards of N9,000 was omitted in a customer’s account.
vi. Discount allowed was overcast by N4,800.
vii. A credit sale of two office machines of N24,000 each was entered into the sales day book.
viii. The statement of profit or loss for the year-end disclosed a net profit of N210,000.

Required:

a. Prepare journal entries with appropriate narrations to correct the errors. (12 Marks)
b. Prepare the suspense account. (4 Marks)
c. Prepare a statement to adjust the net profit after the correction. (4 Marks)
(Total 20 Marks)

Answer

a. Journal Entries:

Date	Details	Dr (N)	Cr (N)	Narration
i. Correction	Suspense Account	240,000	Sales Account	To correct the error of credit sales wrongly posted to customer’s account.
ii. Correction	Suspense Account	27,000	Customer’s Account	To correct dishonoured cheque of N30,000, wrongly debited as N3,000.
iii. Error	Purchases Account	18,000	Suspense Account	To correct overcast in the purchase day book.
iv. Error	Suspense Account	60,000	Supplier’s Account	To correct the overcast on the debit side of a supplier’s account.
v. Correction	Suspense Account	9,000	Returns Inwards Account	To correct omission of returns inwards from customer’s account.
vi. Correction	Discount Allowed Account	4,800	Suspense Account	To correct overcast in discount allowed account.
vii. Error	Sales Account	48,000	Suspense Account	To correct wrong entry of credit sale of office machines in the sales day book.

(Total 12 Marks)

b. Suspense Account:

Suspense Account	Dr (N)	Cr (N)
Opening balance (difference in trial balance)		175,200
Sales wrongly posted to customer account	240,000
Cheque dishonoured error	27,000
Purchases day book overcast		18,000
Supplier’s account overcast	60,000
Returns inwards omission	9,000
Discount allowed overcast		4,800
Credit sale of office machines wrongly posted		48,000
Closing Balance	316,000	316,000

(Total 4 Marks)

c. Statement to Adjust Net Profit:

Details	Effect on Profit (N)
Net Profit as per statement	210,000
Add: Purchases Day Book Overcast	18,000
Less: Credit Sale of Office Machines	(48,000)
Add: Discount Allowed Overcast	4,800
Less: Dishonoured Cheque Adjustment	(27,000)
Adjusted Net Profit	157,800

(Total 4 Marks)

Tags: Correction of Errors, Journal Entries, Profit Adjustment, Suspense account
Level: Level 1

Topic: Correction of errors
Series: NOV 2014

Uploader: Dotse