Appendix 2l

A =L'
1,400 0
Cash ilows: No

(e:n.pt

SE

}DIE

<P

^/N)
.Ttttotvett

i,t-4D

410
990

Retained Earnings
Allowance for Doubtful Accounts

{*e) l{}>

[/'v'ona

'4lboan

Bad Debt Expense

eifeci

->

Ba-./ D<-l-/i,<^p
A

A
)a">t*t,

1.400

.)c I zL

t,8oe

\ n,/,y
1,400

<xr

Allowance for doubtful accounts:

Additional $300 for 2014 sales and $1,100 for 2015
sales
$1,400.

>

)'

Bad debt expnse corrections needed:

2014

/t4-lD /ttao

Accounts written off by year of sale ($550 + $690 = $1,240)

Additional bad debts anticipated (total of $1,400)

tfo i)7a
56b /')7o

Correct amount of bad debt expense each

Bad debt expense previously recorded

yea({g, )

1{t)' r

1,240

+ /,900

Lhe

1-1-b
enrry

2015

300

700
1,100

1,540
(550)

1,800
(1,390)

Bad debt expense adjustment needed

tal bc-lt.e"p $a /' J'/o lt $e books hare beintua

closed for 2015.
frb /,)? a
A =L*
^/A
1,400 0

A-Eror Analysri Il87

990

410

* /,)7D - i,kbA

is:

S[
Retained Earnings
Allowance for Doubtful Accounts

1,400

1,400
1,400

cash fiows: No effect

Income Tax Effects

fu mentioned earlier, the income ta-r effects are not reported with the above correcting
entries in order to make it easier for you to focus on the effects of the errors themselves.
Once you understand the correcting entries, it is easier to add the income tax effects, as we
will do now.
If a correction increases a previous year's income (either by an increase in revenue
or a decrease in expense), the income ta-r expense for that period will usually be increased:
more income, more tax. Ifthe correction reduces a previous year's income (either by a
decrease in revenue or an increase in expense), the income tax expense for that period will
usually be reduced: less income, less tax. The net correction to retained earnings, therefore, is made net oftax. Note that for counterbalancing errors, the income tax effects also
offset each other over the two-year period, assuming tax rates have not changed.
Because the tax return for the previous period has already bcen filed, most adjust-

ments of the previous year's income affects Income Jlx Payable. The Deferred Ta-x Asset/
Liability account is affected only when the treatment for income taxes in the previous year
is a permitted tax treatment. Examples include the depreciation and bad debt non-counterbalancing error situations below. In both these cases, taxable income was correcr as it
was calculated in the prior year, but now the amount of the related temporary difference
has changed.
Illustration 214-l identifies the correcting entries that are needed, including the tax
effects for the counterbalancing and non-counterbalancing examples we just walked
through. A 30% income tax rate is assumed for all years.

tr@nlt

Not Closed

Closed

Coftecting Enties with lncome

Tox Effects

COUNTERBALANCING ERRORS

l.

Accrued Wages
Retained Earnings
lncome Tax Payable
Salaries and Wages
Expense

1050

No Entry

450
1,500