The current assets and current liabilities sections of the balance sheet of Allessandro Scarlatti Company appear as follows.
Allessandro Scarlatti Company
Balance Sheet (Partial)
December 31, 2020 |
Cash |
|
|
|
$ 40,000 |
|
Accounts payable |
|
$ 61,000 |
Accounts receivable |
$89,000 |
|
Notes payable |
67,000 |
Less: Allowance for doubtful accounts |
7,000 |
82,000 |
|
$128,000 |
Inventory |
|
171,000 |
|
|
Prepaid expenses |
|
9,000 |
|
|
|
|
|
|
$302,000 |
|
|
|
|
The following errors in the corporation’s accounting have been discovered:
1. January 2021 cash disbursements entered as of December 2020 included payments of accounts payable in the amount of $39,000, on which a cash discount of 2% was taken.
2. The inventory included $27,000 of merchandise that had been received at December 31 but for which no purchase invoices had been received or entered. Of this amount, $12,000 had been received on consignment; the remainder was purchased f.o.b. destination, terms 2/10, n/30.
3. Sales for the first four days in January 2021 in the amount of $30,000 were entered in the sales journal as of December 31, 2020. Of these, $21,500 were sales on account and the remainder were cash sales.
4. Cash, not including cash sales, collected in January 2021 and entered as of December 31, 2020, totaled $35,324. Of this amount, $23,324 was received on account after cash discounts of 2% had been deducted; the remainder represented the proceeds of a bank loan.
Instructions
a. Restate the current assets and current liabilities sections of the balance sheet in accordance with good accounting practice. (Assume that both accounts receivable and accounts payable are recorded gross.)
b. State the net effect of your adjustments on Allessandro Scarlatti Company’s retained earnings balance.