Question
You have been engaged to review the financial statements of Timberline Lumber. In the course of your examination, you conclude that the bookkeeper hired during the current year is not doing a good job. You notice a number of irregularities, as follows:
- Year-end salaries and wages payable of $4,080 were not recorded because the bookkeeper thought that "they were immaterial."
- Accrued vacation pay for the year of $37,320 was not recorded because the bookkeeper "never heard that you had to do it."
- Insurance for a 12-month period purchased on November 1 of this year was charged to insurance expense in the amount of $3,960 because "the amount of the check is about the same every year."
- Reported sales revenue for the year is $2,289,600. This includes all sales taxes collected for the year. The sales tax rate is 6%. Because the sales tax is forwarded to the Department of Revenue, the Sales Tax Expense account is debited. The bookkeeper thought that "the sales tax is a selling expense." At the end of the current year, the balance in the Sales Tax Expense account is $124,080.
Instructions: Prepare the necessary correcting entries, assuming that Timberline uses a calendar-year basis.
Scoring
- 40% Account naming / line matching
- 40% Amount correctness
- 20% Structure / section placement
IAS 8 — Accounting Policies, Changes in Accounting Estimates and Errors
A prior-period error is corrected retrospectively: restate the comparatives and adjust the opening balance of retained earnings, rather than running the correction through the current year's profit. Establish first whether the error is prior-period or current-period, because that decides everything that follows.
Common mistakes
- Putting a prior-period correction through current profit or loss instead of opening retained earnings.
- Correcting only one side of a two-sided error, or correcting an error that has already counterbalanced itself.
- Confusing an error with a change in estimate — estimates are adjusted prospectively and are never restated.
Further readingIAS 8: policies vs estimates vs errors