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Chapter 22: 22-6BE (page 1307)

In 2017, Bailey Corporation discovered that equipment purchased on January 1, 2015, for $50,000 was expensed at that time. The equipment should have been depreciated over 5 years, with no salvage value. The effective tax rate is 30%. Prepare Bailey鈥檚 2017 journal entry to correct the error. Bailey uses straight-line depreciation

Short Answer

Expert verified

Equipment is debited by $50,000, accumulated depreciation is credited by $20,000, deferred tax liability is credited by $9,000, and retained earnings is credited by $21,000.

Step by step solution

01

Calculation of accumulated depreciation

Accumulateddepreciation=DepreciationExpense脳2=50,0005脳2=$20,000DeferredTaxLiability=RemainngValue脳TaxRate=(50,000-20,000)脳30%=$9,000

02

Journal Entry

Date

Particulars

Debit ($)

Credit ($)

Equipment

50,000

Accumulated depreciation- Equipment

20,000

Deferred Tax Liability

9,000

Retained Earnings

21,000

(Being the correction entry is recorded)

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Most popular questions from this chapter

Lowell Corporation has 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 \(29,000 net income for 2016 and \)37,000 net income for 2017. Further examination of the records reveals that the following items were handled improperly.

1. Rent was received from a tenant in December 2016. The amount, \(1,000, was recorded as revenue at that time even though the rental pertained to 2017.

2. Salaries and wages payable on December 31 have been consistently omitted from the records of that date and have been entered as expenses when paid in the following year. The amounts of the accruals recorded in this manner were:

December 31, 2015 \)1,100

December 31, 2016 1,200

December 31, 2017 940

3. Invoices for supplies purchased have been charged to expense accounts when received. Inventories of supplies on hand at the end of each year have been ignored, and no entry has been made for them.

December 31, 2015 $1,300

December 31, 2016 940

December 31, 2017 1,420

Instructions

Prepare a schedule that will show the corrected net income for the years 2016 and 2017. All items listed should be labeled clearly. (Ignore income tax considerations.)

Pam Erickson Construction Company changed from the completed-contract to the percentage-of-completion method of accounting for long-term construction contracts during 2018. For tax purposes, the company employs the completed-contract method and will continue this approach in the future. (Hint: Adjust all tax consequences through the Deferred Tax Liability account.) The appropriate information related to this change is as follows. Pretax Income from: Percentage-of-Completion Completed-Contract Difference 2017 \(780,000 \)590,000 $190,000 2018 700,000 480,000 220,000 Instructions (a) Assuming that the tax rate is 35%, what is the amount of net income that would be reported in 2018? (b) What entry(ies) are necessary to adjust the accounting records for the change in accounting principle?

Shannon, Inc., changed from the LIFO cost flow assumption to the FIFO cost flow assumption in 2017. The increase in the prior year鈥檚 income before taxes is $1,200,000. The tax rate is 40%. Prepare Shannon鈥檚 2017 journal entry to record the change in accounting principle.

Distinguish between counterbalancing and noncounterbalancing errors. Give an example of each.

Peter Henning Tool Company鈥檚 December 31 year-end financial statements contained the following errors.

December 31, 2017 December 31, 2018

Ending inventory \(9,600 understated \)8,100 overstated

Depreciation expense \(2,300 understated 鈥�

An insurance premium of \)66,000 was prepaid in 2017 covering the years 2017, 2018, and 2019. The entire amount was charged to expense in 2017.

In addition, on December 31, 2018, fully depreciated machinery was sold for $15,000 cash, but the entry was not recorded until 2019.

There were no other errors during 2017 or 2018, and no corrections have been made for any of the errors. (Ignore income tax considerations.)

Instructions

(a) Compute the total effect of the errors on 2018 net income.

(b) Compute the total effect of the errors on the amount of Henning鈥檚 working capital at December 31, 2018.

(c) Compute the total effect of the errors on the balance of Henning鈥檚 retained earnings at December 31, 2018.
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