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Chapter 22: Q19E (page 1313)

A partial trial balance of Julie Hartsack Corporation is as follows on December 31, 2018.

Dr. Cr.

Supplies \( 2,700

Salaries and wages payable \) 1,500

Interest receivable 5,100

Prepaid insurance 90,000

Unearned rent 鈥�0鈥�

Interest payable 15,000

Additional adjusting data:

1. A physical count of supplies on hand on December 31, 2018, totaled \(1,100.

2. Through oversight, the Salaries and Wages Payable account was not changed during 2018. Accrued salaries and wages on December 31, 2018, amounted to \)4,400.

3. The Interest Receivable account was also left unchanged during 2018. Accrued interest on investments amounts to \(4,350 on December 31, 2018.

4. The unexpired portions of the insurance policies totaled \)65,000 as of December 31, 2018.

5. \(28,000 was received on January 1, 2018, for the rent of a building for both 2018 and 2019. The entire amount was credited to rent revenue.

6. Depreciation on equipment for the year was erroneously recorded as \)5,000 rather than the correct figure of \(50,000.

7. A further review of depreciation calculations of prior years revealed that equipment depreciation of \)7,200 was not recorded. It was decided that this oversight should be corrected by a prior period adjustment.

Instructions

(a) Assuming that the books have not been closed, what are the adjusting entries necessary at December 31, 2018? (Ignore income tax considerations.)

(b) Assuming that the books have been closed, what are the adjusting entries necessary at December 31, 2018? (Ignore income tax considerations.)

(c) Repeat the requirements for items 6 and 7, taking into account income tax effects (40% tax rate) and assuming that the books have been closed.

Short Answer

Expert verified

All the journal entries are passed in step 1, step 2, and step 3 below:

Step by step solution

01

Journal entries for part A

Date

Particulars

Debit ($)

Credit ($)

1.

Supplied Expense

1,600

Supplies

1,600

(Being supplies expense recorded)

2.

Salary and wages expense

2,900

Salary and wages payable

2,900

(Being salary and wage expense recorded)

3.

Interest Revenue

750

Interest Receivable on Investment

750

(interest revenue recorded)

4.

Insurance Expense

25,000

Prepaid Insurance

25,000

(Being Insurance expense recorded)

5.

Rent Revenue

14,000

Unearned Rent revenue

14,000

(Being rent revenue recorded)

6.

Depreciation expense

45,000

Accumulated Depreciation

45,000

(being Depreciation expense recorded)

7.

Retained Earnings

7,200

Accumulated Depreciation

7,200

(Being adjustment recorded)

02

Journal entries for part B

Date

Particulars

Debit ($)

Credit ($)

1.

Retained Earnings

1,600

Supplies

1,600

(Being adjustment recorded)

2.

Retained Earnings

2,900

Salaries and wages Payable

2,900

(Being adjustment recorded)

3.

Retained Earnings

750

Interest receivables

750

(Being adjustment recorded)

4.

Retained Earnings

25,000

Prepaid Insurance

25,000

(Being adjustment recorded)

5.

Retained Earnings

14,000

Unearned Rent Revenue

14,000

(Being adjustment recorded)

6.

Retained Earnings

45,000

Accumulated Depreciation

45,000

(Being adjustment recorded)

7.

Retained Earnings

7,200

Accumulated Depreciation

7,200

(Being adjustment recorded)

03

Journal entries for part C

Date

Particulars

Debit ($)

Credit ($)

6.

Retained Earnings

27,000

Income taxes receivables

18,000

Accumulated Depreciation

45,000

(Being adjustment recorded)

7.

Retained Earnings

4,320

Income taxes receivables

2,880

Accumulated Depreciation

7,200

(Being adjustment recorded)

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Most popular questions from this chapter

(Change in Principle, Estimate) As a certified public accountant, you have been contacted by Joe Davison, CEO of Sports-Pro Athletics, Inc., a manufacturer of a variety of athletic equipment. He has asked you how to account for the following changes.

1. Sports-Pro appropriately changed its depreciation method for its machinery from the double-declining-balance method to the units-of-production method effective January 1, 2017.

2. Effective January 1, 2017, Sports-Pro appropriately changed the salvage values used in computing depreciation for its office equipment.

3. On December 31, 2017, Sports-Pro appropriately changed the specific subsidiaries constituting the group of companies for which consolidated financial statements are presented.

Instructions

Write a 1鈥�1.5 page letter to Joe Davison explaining how each of the above changes should be presented in the December 31, 2017, financial statements.

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.

Where can authoritative IFRS related to accounting changes be found?

(Analysis of Various Accounting Changes and Errors) Mathys Inc. has recently hired a new independent auditor, Karen Ogleby, who says she wants 鈥渢o get everything straightened out.鈥� Consequently, she has proposed the following accounting changes in connection with Mathys Inc.鈥檚 2017 financial statements.

1. At December 31, 2016, the client had a receivable of \(820,000 from Hendricks Inc. on its balance sheet. Hendricks Inc. has gone bankrupt, and no recovery is expected. The client proposes to write off the receivable as a prior period item.

2. The client proposes the following changes in depreciation policies.

(a) For office furniture and fixtures, it proposes to change from a 10-year useful life to an 8-year life. If this change had been made in prior years, retained earnings at December 31, 2016, would have been \)250,000 less. The effect of the change on 2017 income alone is a reduction of \(60,000.

(b) For its new equipment in the leasing division, the client proposes to adopt the sum-of-the-years鈥�-digits depreciation method. The client had never used SYD before. The first year the client operated a leasing division was 2017. If straight-line depreciation were used, 2017 income would be \)110,000 greater.

3. In preparing its 2016 statements, one of the client鈥檚 bookkeepers overstated ending inventory by \(235,000 because of a mathematical error. The client proposes to treat this item as a prior period adjustment.

4. In the past, the client has spread preproduction costs in its furniture division over 5 years. Because its latest furniture is of the 鈥渇ad鈥� type, it appears that the largest volume of sales will occur during the first 2 years after introduction. Consequently, the client proposes to amortize preproduction costs on a per-unit basis, which will result in expensing most of such costs during the first 2 years after the furniture鈥檚 introduction. If the new accounting method had been used prior to 2017, retained earnings at December 31, 2016, would have been \)375,000 less.

5. For the nursery division, the client proposes to switch from FIFO to LIFO inventories because it believes that LIFO will provide a better matching of current costs with revenues. The effect of making this change on 2017 earnings will be an increase of \(320,000. The client says that the effect of the change on December 31, 2016, retained earnings cannot be determined.

6. To achieve an appropriate recognition of revenues and expenses in its building construction division, the client proposes to switch from the completed-contract method of accounting to the percentage-of-completion method. Had the percentage-of-completion method been employed in all prior years, retained earnings at December 31, 2016, would have been \)1,075,000 greater.

Instructions

(a) For each of the changes described above, decide whether:

(1) The change involves an accounting principle, accounting estimate, or correction of an error.

(2) Restatement of opening retained earnings is required.

(b) What would be the proper adjustment to the December 31, 2016, retained earnings?

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.
See all solutions

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