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Chapter 22: Q16E. (page 1312)

You have been engaged to review the financial statements of Gottschalk Corporation. In the course of your examination, you conclude that the bookkeeper hired during the current year is not doing a good job. You notice a number of irregularities as follows.

1. Year-end wages payable of \(3,400 were not recorded because the bookkeeper thought that 鈥渢hey were immaterial.鈥�

2. Accrued vacation pay for the year of \)31,100 was not recorded because the bookkeeper 鈥渘ever heard that you had to do it.鈥�

3. Insurance for a 12-month period purchased on November 1 of this year was charged to insurance expense in the amount of \(2,640 because 鈥渢he amount of the check is about the same every year.鈥� 4. Reported sales revenue for the year is \)2,120,000. This includes all sales taxes collected for the year. The sales tax rate is 6%. Because the sales tax is forwarded to the state鈥檚 Department of Revenue, the Sales Tax Expense account is debited. The bookkeeper thought that 鈥渢he sales tax is a selling expense.鈥� At the end of the current year, the balance in the Sales Tax Expense account is $103,400.

Instructions Prepare the necessary correcting entries, assuming that Gottschalk uses a calendar-year basis.

Short Answer

Expert verified

All the entries for the correction of errors are recorded in steps 1 to 4.

Step by step solution

01

Part 1

Date

Particulars

Debit ($)

Credit ($)

Salaries and wages expense

Salaries and wages Payable

3,400

(Being error corrected)

3,400

02

Part 2

Date

Particulars

Debit ($)

Credit ($)

Salaries and wages expense

31,100

Salaries and wages Payable

31,100

(Being error corrected)

03

Part 3

Date

Particulars

Debit ($)

Credit ($)

Prepaid Insurance

2,200

Insurance expense

2,200

(Being error corrected)

04

Part 4

Date

Particulars

Debit ($)

Credit ($)

Sales revenue

120,000

Sales taxes payable

120,000

(Being sales tax due recorded)

Sales taxes payable

103,400

Sales tax expense

103,400

(Being reverse entry recorded)

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Most popular questions from this chapter

(Change in Estimate) Mike Crane is an audit senior of a large public accounting firm who has just been assigned to the Frost Corporation鈥檚 annual audit engagement. Frost has been a client of Crane鈥檚 firm for many years. Frost is a fastgrowing business in the commercial construction industry. In reviewing the fixed asset ledger, Crane discovered a series of unusual accounting changes, in which the useful lives of assets, depreciated using the straight-line method, were substantially lowered near the midpoint of the original estimate. For example, the useful life of one dump truck was changed from 10 to 6 years during its fifth year of service. Upon further investigation, Mike was told by Kevin James, Frost鈥檚 accounting manager, 鈥淚 don鈥檛 really see your problem. After all, it鈥檚 perfectly legal to change an accounting estimate. Besides, our CEO likes to see big earnings!鈥�

Instructions Answer the following questions.

(a) What are the ethical issues concerning Frost鈥檚 practice of changing the useful lives of fixed assets?

(b) Who could be harmed by Frost鈥檚 unusual accounting changes?

(c) What should Crane do in this situation?

Botticelli Inc. was organized in late 2015 to manufacture and sell hosiery. At the end of its fourth year of operation, the company has been fairly successful, as indicated by the following reported net incomes.

2015 \(140,000a 2017 \)205,000

2016 160,000b 2018 276,000

a Includes a \(10,000 increase because of change in bad debt experience rate.

bIncludes a gain of \)30,000.

The company has decided to expand operations and has applied for a sizable bank loan. The bank officer has indicated that the records should be audited and presented in comparative statements to facilitate analysis by the bank. Botticelli Inc. therefore hired the auditing firm of Check & Doublecheck Co. and has provided the following additional information.

1. In early 2016, Botticelli Inc. changed its estimate from 2% of sales to 1% on the amount of bad debt expense to be charged to operations. Bad debt expense for 2015, if a 1% rate had been used, would have been \(10,000. The company therefore restated its net income for 2015.

2. In 2018, the auditor discovered that the company had changed its method of inventory pricing from LIFO to FIFO. The effect on the income statements for the previous years is as follows.

2015 2016 2017 2018

Net income unadjusted鈥擫IFO basis \)140,000 \(160,000 \)205,000 \(276,000

Net income unadjusted鈥擣IFO basis 155,000 165,000 215,000 260,000

\) 15,000 \( 5,000 \) 10,000 \( (16,000)

3. In 2018, the auditor discovered that:

(a) The company incorrectly overstated the ending inventory (under both LIFO and FIFO) by \)14,000 in 2017.

(b) A dispute developed in 2016 with the Internal Revenue Service over the deductibility of entertainment expenses. In 2015, the company was not permitted these deductions, but a tax settlement was reached in 2018 that allowed these expenses. As a result of the court鈥檚 finding, tax expenses in 2018 were reduced by $60,000.

Instructions

(a) Indicate how each of these changes or corrections should be handled in the accounting records. (Ignore income tax considerations.)

(b) Present net income as reported in comparative income statements for the years 2015 to 2018

(Accounting for Accounting Changes and Errors) Listed below are various types of accounting changes and errors.

______ 1. Change in a plant asset鈥檚 salvage value.

______ 2. Change due to overstatement of inventory.

______ 3. Change from sum-of-the-years鈥�-digits to straight-line method of depreciation.

______ 4. Change from presenting unconsolidated to consolidated financial statements.

______ 5. Change from LIFO to FIFO inventory method.

______ 6. Change in the rate used to compute warranty costs.

______ 7. Change from an unacceptable accounting principle to an acceptable accounting principle.

______ 8. Change in a patent鈥檚 amortization period.

______ 9. Change from completed-contract to percentage-of-completion method on construction contracts.

______ 10. Change from FIFO to average-cost inventory method.

Instructions For each change or error, indicate how it would be accounted for using the following code letters:

(a) Accounted for prospectively.

(b) Accounted for retrospectively.

(c) Neither of the above.

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?

Analysis of Various Accounting Changes and Errors) Various types of accounting changes can affect the financial statements of a business enterprise differently. Assume that the following list describes changes that have a material effect on the financial statements for the current year of your business enterprise.

1. A change from the completed-contract method to the percentage-of-completion method of accounting for long-term construction-type contracts.

2. A change in the estimated useful life of previously recorded fixed assets as a result of newly acquired information.

3. A change from deferring and amortizing preproduction costs to recording such costs as an expense when incurred because future benefits of the costs have become doubtful. The new accounting method was adopted in recognition of the change in estimated future benefits.

4. A change from including the employer share of FICA taxes with payroll tax expenses to including it with 鈥淩etirement benefits鈥� on the income statement.

5. Correction of a mathematical error in inventory pricing made in a prior period.

6. A change from presentation of statements of individual companies to presentation of consolidated statements.

7. A change in the method of accounting for leases for tax purposes to conform with the financial accounting method. As a result, both deferred and current taxes payable changed substantially.

8. A change from the FIFO method of inventory pricing to the LIFO method of inventory pricing.

Instructions Identify the type of change that is described in each item above and indicate whether the prior year鈥檚 financial statements should be recast when presented in comparative form with the current year鈥檚 financial statements
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