Reference no: EM132497003

Waterloo 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 2019 and $37,000 net income for 2020. Further examination od the records reveals that the following items were handled improperly.

Rent of $1,400 was received from a tenant in December 2019, but the full amount was recorded as income at that time even though the rental related to 2020.

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:

Dec. 31, 2018 $1,100

Dec. 31, 2019 1,500

Dec. 31 2020 940

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

Dec. 31, 2018 $1,300

Dec. 31, 2019 740

Dec. 31 2020 1,520

Instructions

Question 1: Show a schedule that shows the corrected net income for the years 2019 and 2020. All listed items should be labelled clearly. Ignore income tax considerations.

Question 2: Show the required journal entries to correct the 2020 net income. Assume that the books are open and ignore income tax considerations.

Question 3: Assume that Waterloo had unsdjusted retained earnings of $95,000 at January 1, 2019, and $124,000 at January 1, 2020. Show a schedule that shows the corrected opening retained earnings balances.

Question 4: Assume that Waterloo had total net sales revenues of $1.2 million in 2019 and 2020, respectively. From the perspective of an investor, discuss the effects of the errors on Waterloo's profit margin in 2019 and 2020.