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 2022 and $37,000 net income for 2023. 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 2022, but the full amount was recorded as income at that time even though the rental related to 2023.

2. Wages payable on December 31 were consistently omitted from the records of that date and were entered instead as expenses when paid in the following year. The amounts of the accruals that were recorded in this way were as follows:

3. Invoices for office supplies purchased were charged to expense accounts when received. Inventories of supplies on hand at the end of each year were ignored, and no entry was made for them. The inventories were as follows:

Instructions

a. Prepare a schedule that shows the corrected net income for the years 2022 and 2023. All listed items should be labelled clearly. Ignore income tax considerations.

b. Prepare the required journal entries to correct the 2023 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, 2022, and $124,000 at January 1, 2023. 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 2022 and 2023, respectively. From the perspective of an investor, discuss the effects of the errors on Kitchener’s profit margin in 2022 and 2023.

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Dec. 31, 2021 Dec. 31, 2022 Dec. 31, 2023 $1,100 1,500 940