Kitchener Corporation has followed IFRS and used the accrual basis of accounting for several years. A review of the records, however, indicates that some expenses and revenues have been handled on a cash basis because of errors made by an inexperienced bookkeeper. Income statements prepared by the bookkeeper reported $29,000 net income for 2013 and $37,000 net income for 2014. Further examination of the records reveals that the following items were handled improperly.
1. Rent of $1,300 was received from a tenant in December 2013, but the full amount was recorded as income at that time even though the rental related to 2014.
2. Wages payable on December 31 have been consistently omitted from the records of that date and have been entered instead as expenses when paid in the following year. The amounts of the accruals that were recorded in this way were as follows:
Dec. 31, 2012 ....................... $1,100
Dec. 31, 2013 ....................... 1,500
Dec. 31, 2014 ....................... 940
3. Invoices for office supplies purchased have been charged to expense accounts when received. Inventories of supplies on hand at the end of each year have been ignored, and no entry has been made for them. The inventories were as follows:
Dec. 31, 2012 ....................... $1,300
Dec. 31, 2013 ....................... 740
Dec. 31, 2014 ....................... 1,420
Instructions
(a) Prepare a schedule that shows the corrected net income for the years 2013 and 2014. All listed items should be labelled clearly. Ignore income tax considerations.
(b) Prepare the required journal entries to correct the 2014 net income. Assume that the books are open and ignore income tax considerations.
(c) Assume that Kitchener had unadjusted retained earnings of $95,000 at January 1, 2013, and of $124,000 at January 1, 2014. Prepare a schedule that shows the corrected opening retained earnings balances.
(d) Assume that Kitchener had total net sales revenue of $1.2 million and $1.1 million in 2013 and 2014, respectively. From the perspective of an investor, discuss the effects of the errors on Kitchener's profit margin in 2013 and 2014.