In April,2016,Norman Industries sold Available-for-Sale securities that cost $450,000 and received a check from its broker for $793,000.When the check was deposited,the accounting clerk debited cash and credited investments for the full amount.The CFO questioned the entry in December,2016.If this is an error,what is the proper correcting entry? (Tax rate is 40%.)
A) Gain on Sale of Investments 343,000
B) Gain on Sale of Investments 343,000 Retained Earnings-Prior Period Adj. 450,000
C) Income Tax Expense 137,200 Retained Earnings 205,800
D) AFS Investments 343,000

Question

In April,2016,Norman Industries sold Available-for-Sale securities that cost $450,000 and received a check from its broker for $793,000.When the check was deposited,the accounting clerk debited cash and credited investments for the full amount.The CFO questioned the entry in December,2016.If this is an error,what is the proper correcting entry? (Tax rate is 40%.)
A) Gain on Sale of Investments 343,000 
B) Gain on Sale of Investments 343,000 Retained Earnings-Prior Period Adj. 450,000 
C) Income Tax Expense 137,200 Retained Earnings 205,800 
D) AFS Investments 343,000

Quizplus · Accepted Answer

The proper correcting entry would involve recognizing the gain on sale of the investments and adjusting for the tax implications. Therefore, option C is the correct choice. The gain on sale of investments would be credited to the Gain on Sale of Investments account for $343,000 (which is the difference between the selling price of $793,000 and the cost of $450,000). Income Tax Expense would be debited for $137,200, which is 40% of the gain. Finally, the remaining amount of $205,800 would be credited to Retained Earnings. The other options do not account for the tax implications and/or do not fully correct the initial error.

In April,2016,Norman Industries Sold Available-For-Sale Securities That Cost $450,000 and Received