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Chapter 22: 8P (page 1319)

On March 5, 2018, you were hired by Hemingway Inc., a closely held company, as a staff member of its newly created internal auditing department. While reviewing the company鈥檚 records for 2016 and 2017, you discover that no adjustments have yet been made for the following items. Items

1. Interest income of \(14,100 was not accrued at the end of 2016. It was recorded when received in February 2017.

2. A computer costing \)4,000 was expensed when purchased on July 1, 2016. It is expected to have a 4-year life with no salvage value. The company typically uses straight-line depreciation for all fixed assets.

3. Research and development costs of \(33,000 were incurred early in 2016. They were capitalized and were to be amortized over a 3-year period. Amortization of \)11,000 was recorded for 2016 and \(11,000 for 2017.

4. On January 2, 2016, Hemingway leased a building for 5 years at a monthly rental of \)8,000. On that date, the company paid the following amounts, which were expensed when paid. Security deposit \(20,000 First month鈥檚 rent 8,000 Last month鈥檚 rent 8,000 \)36,000

5. The company received \(36,000 from a customer at the beginning of 2016 for services that it is to perform evenly over a 3-year period beginning in 2016. None of the amount received was reported as unearned revenue at the end of 2016.

6. Merchandise inventory costing \)18,200 was in the warehouse at December 31, 2016, but was incorrectly omitted from the physical count at that date. The company uses the periodic inventory method.

Instructions

Indicate the effect of any errors on the net income figure reported on the income statement for the year ending December 31, 2016, and the retained earnings figure reported on the balance sheet at December 31, 2017. Assume all amounts are material, and ignore income tax effects. Using the following format, enter the appropriate dollar amounts in the appropriate columns. Consider each item independent of the other items. It is not necessary to total the columns on the grid.

Short Answer

Expert verified

Retained earnings are the accumulated profits, and the effect of the error is shown

Step by step solution

01

Definition of Retained Earnings

The retained Earnings refer to the accumulated profit after distributing the dividends to the shareholders of the company.

02

The effect of errors

Net Income for 2016

Retained Earnings at 12/31/17

Item

Understated

Overstated

Understated

Overstated

1.

14,100


No effect

No effect

2.

3,500


2,500


3.

22,000


11,000

4.

28,000


28,000


5.

24,000


12,000

6.

18,200


No effect

No effect

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Most popular questions from this chapter

Gerald Englehart Industries changed from the double-declining-balance to the straight-line method in 2018 on all its equipment. There was no change in the assets鈥� salvage values or useful lives. Plant assets, acquired on January 2, 2015, had an original cost of \(1,600,000, with a \)100,000 salvage value and an 8-year estimated useful life. Income before depreciation expense was \(270,000 in 2017 and \)300,000 in 2018.

Instructions (a) Prepare the journal entry(ies) to record depreciation expense in 2018.

(b) Starting with income before depreciation expense, prepare the remaining portion of the income statement for 2017 and 2018.

Prior to 2017, Heberling Inc. excluded manufacturing overhead costs from work in process and finished goods inventory. These costs have been expensed as incurred. In 2017, the company decided to change its accounting methods for manufacturing inventories to full costing by including these costs as product costs. Assuming that these costs are material, how should this change be reflected in the financial statements for 2016 and 2017?

Where can authoritative IFRS related to accounting changes be found?

Aston Corporation performs year-end planning in November of each year before its calendar year ends in December. The preliminary estimated net income is \(3 million. The CFO, Rita Warren, meets with the company president, J. B. Aston, to review the projected numbers. She presents the following projected information. ASTON CORPORATION PROJECTED INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2017 Sales \)28,995,000 Interest revenue 5,000 Cost of goods sold \(14,000,000 Depreciation 2,600,000 Operating expenses 6,400,000 23,000,000 Income before income tax 6,000,000 Income tax 3,000,000 Net income \) 3,000,000 ASTON CORPORATION SELECTED BALANCE SHEET INFORMATION AT DECEMBER 31, 2017 Estimated cash balance \( 5,000,000 Available-for-sale debt investments (at cost) 10,000,000 Fair value adjustment (1/1/17) 鈥�0鈥� Estimated fair value at December 31, 2017: Security Cost Estimated Fair Value A \) 2,000,000 \( 2,200,000 B 4,000,000 3,900,000 C 3,000,000 3,100,000 D 1,000,000 1,800,000 Total \)10,000,000 \(11,000,000 Other information at December 31, 2017: Equipment \)3,000,000 Accumulated depreciation (5-year SL) 1,200,000 New robotic equipment (purchased 1/1/17) 5,000,000 Accumulated depreciation (5-year DDB) 2,000,000 The corporation has never used robotic equipment before, and Warren assumed an accelerated method because of the rapidly changing technology in robotic equipment. The company normally uses straight-line depreciation for production equipment. Aston explains to Warren that it is important for the corporation to show a \(7,000,000 income before taxes because Aston receives a \)1,000,000 bonus if the income before taxes and bonus reaches \(7,000,000. Aston also does not want the company to pay more than \)3,000,000 in income taxes to the government.

Instructions (a) What can Warren do within GAAP to accommodate the president鈥檚 wishes to achieve $7,000,000 in income before taxes and bonus? Present the revised income statement based on your decision. (b) Are the actions ethical? Who are the stakeholders in this decision, and what effect do Warren鈥檚 actions have on their interests?

You have been asked by a client to review the records of Roberts Company, a small manufacturer of precision tools and machines. Your client is interested in buying the business, and arrangements have been made for you to review the accounting records. Your examination reveals the following information.

1. Roberts Company commenced business on April 1, 2015, and has been reporting on a fiscal year ending March 31. The company has never been audited, but the annual statements prepared by the bookkeeper reflect the following income before closing and before deducting income taxes.

Year Ended March 31 Income Before Taxes

2016 \( 71,600

2017 111,400

2018 103,580

2. A relatively small number of machines have been shipped on consignment. These transactions have been recorded as ordinary sales and billed as such. On March 31 of each year, machines billed and in the hands of consignees amounted to:

2016 \)6,500

2017 none

2018 5,590

Sales price was determined by adding 25% to cost. Assume that the consigned machines are sold the following year.

3. On March 30, 2017, two machines were shipped to a customer on a C.O.D. basis. The sale was not entered until April 5, 2017, when cash was received for \(6,100. The machines were not included in the inventory at March 31, 2017. (Title passed on March 30, 2017.)

4. All machines are sold subject to a 5-year warranty. It is estimated that the expense ultimately to be incurred in connection with the warranty will amount to 陆 of 1% of sales. The company has charged an expense account for warranty costs incurred. Sales per books and warranty costs were as follows.

Year Ended March 31 Sales Warranty Expense for Sales Made in

2016 2017 2018 Total

2016 \) 940,000 \(760 \) 760

2017 1,010,000 360 \(1,310 1,670

2018 1,795,000 320 1,620 \)1,910 3,850

Bad Debts Incurred on Sales Made in Bad Debt Expense 2016 2017 2018 Total Based on 1% of Receivables 2016 \(750 \) 750 \(2,334 2017 800 \) 520 1,320 2,557 2018 350 1,800 \(1,700 3,850 4,458

5. Bad debts have been recorded on a direct write-off basis. Experience of similar enterprises indicates that losses will approximate 1% of receivables. Bad debts written off were:

6. The bank deducts 6% on all contracts financed. Of this amount, 陆% is placed in a reserve to the credit of Roberts Company that is refunded to Roberts as finance contracts are paid in full. (Thus, Roberts should have a receivable for these payments and should record revenue when the net balance is remitted each year.) The reserve established by the bank has not been reflected in the books of Roberts. The excess of credits over debits (net increase) to the reserve account with Roberts on the books of the bank for each fiscal year were as follows. 2016 \) 3,000 2017 3,900 2018 5,100 \(12,000

7. Commissions on sales have been entered when paid. Commissions payable on March 31 of each year were as follows. 2016 \)1,400 2017 900 2018 1,120

8. A review of the corporate minutes reveals the manager is entitled to a bonus of 1% of the income before deducting income taxes and the bonus. The bonuses have never been recorded or paid.

Instructions

(a) Present a schedule showing the revised income before income taxes for each of the years ended March 31, 2016, 2017, and 2018. (Make computations to the nearest whole dollar.)

(b) Prepare the journal entry or entries you would give the bookkeeper to correct the books. Assume the books have not yet been closed for the fiscal year ended March 31, 2018. Disregard correction of income taxes.
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