66 HASKINS & SELLS September
Solutions to Problems
PROBLEM NO. I
THE solution to this problem requires
only a small amount of thought, but
it must be intensive thought. It
must be noted first that the errors apply to
1916 and 1917 respectively. Those which
relate to the inventory of December 31,
1916, affect the surplus. The adjustments
of the inventory of December 31, 1917,
affect the profit and loss account of the
year ended on such date. The corrections
of the errors increase or decrease the surplus
or the profit and loss account respectively
as the case may be. One of the main
points in the problem is to test the candidate's
knowledge as to whether or not the
errors relating to the inventory of December
31, 1916, affect the profits for 1917.
A further very troublesome point is the
item of $4,000 for material received and
included in the accounts payable but not included
in the inventory. The suggestion is
that the accounts were not in balance. No
doubt many a candidate took that position
and made a single entry, thereby offsetting
the good results of his work up to that
point. It is probable that when accounts
payable were credited some account like
purchases or merchandise was debited.
When the books were closed there was
made presumably the traditional entry,
"Inventory new to Inventory old," or "Inventory
to Merchandise or Purchases.'
The entry was quite proper but the amount
was $4,000 less than it should have been.
The correcting entry would charge "Inventory"
and credit "Profit & Loss". The
reason for this is that the previous credit
to merchandise on account of goods unsold
was too small, resulting in a figure for
cost of goods sold which was too large,
and consequently a profit which was too
small in the amount of $4,000.
The entries in their entirety, but with
explanations omitted for the sake of brevity,
DECEMBER 31, 1916.
Inventory $ 500
Surplus $ 500
DECEMBER 31, 1917.
Profit & Loss $ 2,000
Inventory $ 2,000
Profit & Loss 10,000
Profit & Loss 4,000
The net effect of the errors on the
profits of each of the two years is shown
by the following ledger accounts :
Surplus 12/31/16 Profit & Loss 12/31/17
It is possible that the correct solution