Reference no: EM132990029

Question - On 23 November 20X7, when engaged in preparing for the 20X7 fiscal year-end, the chief accountant of Harper Ltd. discovered two accounting errors in the 20X5 statements:

a. A government ministry had paid $4.5 million in partial settlement of an amount due for a large contract. The contract revenue had already been recognized. However, the payment was accidentally credited to contract revenue instead of to accounts receivable and was included in taxable income.

b. Inventory purchases of $2.4 million had inadvertently been charged to equipment, a capital asset account, and had been amortized by 10% for each of 20X5 and 20X6. The accounting amortization rate is the same as the CCA rate for tax purposes. The ending and beginning inventories had been properly stated. Therefore, the mistake caused cost of sales to be understated by $2.4 million and pretax earnings to be overstated by the same amount.

Harper's income tax rate is 20%.

Required -

1. Calculate the earnings correction that Harper must show in the 20X7 financial statements. Where will these amounts be disclosed?

2. Prepare general journal entry to record the correction of each error.