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Chapter 22: Q15E. (page 1312)

(Error Correction Entries) The first audit of the books of Bruce Gingrich Company was made for the year ended December 31, 2018. In examining the books, the auditor found that certain items had been overlooked or incorrectly handled in the last 3 years.

These items are:

1. At the beginning of 2016, the company purchased a machine for \(510,000 (salvage value of \)51,000) that had a useful life of 6 years. The bookkeeper used straight-line depreciation but failed to deduct the salvage value in computing the depreciation base for the 3 years.

2. At the end of 2017, the company failed to accrue sales salaries of \(45,000.

3. A tax lawsuit that involved the year 2016 was settled late in 2018. It was determined that the company owed an additional \)85,000 in taxes related to 2016. The company did not record a liability in 2016 or 2017 because the possibility of loss was considered remote, and charged the \(85,000 to a loss account in 2018.

4. Gingrich Company purchased a copyright from another company early in 2016 for \)45,000. Gingrich had not amortized the copyright because its value had not diminished. The copyright has a useful life at purchase of 20 years.

5. In 2018, the company wrote off $87,000 of inventory considered to be obsolete; this loss was charged directly to Retained Earnings. Instructions Prepare the journal entries necessary in 2018 to correct the books, assuming that the books have not been closed. Disregard effects of corrections on income tax.

Short Answer

Expert verified

All the entries are passed for the correction from step 1 to step 5.

Step by step solution

01

First Error

Date

Particulars

Debit ($)

Credit ($)

Accumulated depreciation- Equipment

25,500

Depreciation Expense

8,500

Retained earnings

17,000

(being error corrected)

2013-2014 ($)

2015 ($)

Depreciation Taken

170,000

85,000

Less Depreciation (correct)

153,000

76,500

17,000

8,500

02

Second Error

Date

Particulars

Debit ($)

Credit ($)

Retained Earnings

45,000

Salaries and wages payable

45,000

(Being error corrected)

03

Third error

No entry is required

04

Fourth error

Date

Particulars

Debit ($)

Credit ($)

Amortization expense

2,250

Retained earnings

4,500

Copyrights

6,750

(being error corrected)

05

Fifth Error

Date

Particulars

Debit ($)

Credit ($)

Write off of inventories

87,000

Retained earnings

87,000

(being error corrected

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Most popular questions from this chapter

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?

On January 1, 2017, Millay Inc. paid \(700,000 for 10,000 shares of Genso Company鈥檚 voting common stock, which was a 10% interest in Genso. At that date, the net assets of Gensototaled \)6,000,000. The fair values of all of Genso鈥檚 identifiable assets and liabilities were equal to their book values. Millay does not have the ability to exercise significant influence over the operating and financial policies of Genso. Millay received dividends of \(1.50 per share from Genso on October 1, 2017. Genso reported net income of \)550,000 for the year ended December 31, 2017.

On July 1, 2018, Millay paid \(2,325,000 for 30,000 additional shares of Genso Company鈥檚 voting common stock which represents a 30% investment in Genso. The fair values of all of Genso鈥檚 identifiable assets net of liabilities were equal to their book values of \)6,550,000. As a result of this transaction, Millay has the ability to exercise significant influence over the operating and financial policies of Genso. Millay received dividends of \(2.00 per share from Genso on April 1, 2018, and \)2.50 per share on October 1, 2018. Genso reported net income of \(650,000 for the year ended December 31, 2018, and \)350,000 for the 6 months ended December 31, 2018.

Instructions (For both purchases, assume any excess of cost over book value is due to goodwill.)

(a) Prepare a schedule showing the income or loss before income taxes for the year ended December 31, 2017, that Millay should report from its investment in Genso in its income statement issued in March 2018.

(b) During March 2019, Millay issues comparative financial statements for 2017 and 2018. Prepare schedules showing the income or loss before income taxes for the years ended December 31, 2017 and 2018, that Millay should report from its investment in Genso.

Under IFRS, the retrospective approach should not be used if:

(a) retrospective application requires assumptions about management鈥檚 intent in a prior period.

(b) the company does not have trained staff to perform the analysis.

(c) the effects of the change have counterbalanced.

(d) the effects of the change have not counterbalanced.

The management of Utrillo Instrument Company had concluded, with the concurrence of its independent auditors, that results of operations would be more fairly presented if Utrillo changed its method of pricing inventory from last-in, first-out (LIFO) to average-cost in 2017. Given below is the 5-year summary of income under LIFO and a schedule of what the inventories would be if stated on the average-cost method.

UTRILLO INSTRUMENT COMPANY STATEMENT OF INCOME AND RETAINED EARNINGS FOR THE YEARS ENDED MAY 31 2013 2014 2015 2016 2017 Sales鈥攏et \(13,964 \)15,506 \(16,673 \)18,221 \(18,898 Cost of goods sold Beginning inventory 1,000 1,100 1,000 1,115 1,237 Purchases 13,000 13,900 15,000 15,900 17,100 Ending inventory (1,100) (1,000) (1,115) (1,237) (1,369) Total 12,900 14,000 14,885 15,778 16,968 Gross profi t 1,064 1,506 1,788 2,443 1,930 Administrative expenses 700 763 832 907 989 Income before taxes 364 743 956 1,536 941 Income taxes (50%) 182 372 478 768 471 Net income 182 371 478 768 470 Retained earnings鈥攂eginning 1,206 1,388 1,759 2,237 3,005 Retained earnings鈥攅nding \) 1,388 \( 1,759 \) 2,237 \( 3,005 \) 3,475 Earnings per share \(1.82 \)3.71 \(4.78 \)7.68 \(4.70 SCHEDULE OF INVENTORY BALANCES USING AVERAGE-COST METHOD FOR THE YEARS ENDED MAY 31 2012 2013 2014 2015 2016 2017 \)1,010 \(1,124 \)1,101 \(1,270 \)1,500 $1,720

Instructions Prepare comparative statements for the 5 years, assuming that Utrillo changed its method of inventory pricing to average-cost. Indicate the effects on net income and earnings per share for the years involved. Utrillo Instruments started business in 2012. (All amounts except EPS are rounded up to the nearest dollar.)

Oliver Corporation has owned stock of Conrad Corporation since 2014. At December 31, 2017, its balances related to this investment were:

Equity Investments \(185,000

Fair Value Adjustment (AFS) 34,000 Dr.

Accumulated Unrealized Holding Gain or Loss鈥擨ncome (recorded in Retained Earnings) 34,000 Cr.

On January 1, 2018, Oliver purchased additional stock of Conrad Company for \)475,000 and now has significant influence over Conrad. If the equity method had been used in 2014鈥�2017, Oliver鈥檚 share of income would have been $33,000 greater than dividends received. Prepare Oliver鈥檚 journal entries to record the purchase of the investment and the change to the equity method.
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