The first audit of the books of Swift Limited was recently carried out for the year ended December 31, 2021. Swift follows IFRS. In examining the books, the auditor found that certain items had been overlooked or might have been incorrectly handled in the past: 1. At the beginning of 2019, the company purchased a machine for $480,000 (residual value of $30,000) that had a useful life of six years. The bookkeeper used straight-line depreciation but failed to deduct the residual value in calculating the depreciation base for the three years. 2. Swift purchased another company early in 2017 and recorded goodwill of $450,000 Swift amortized $20,000 of goodwill in 2017, and $40,000 in each subsequent year. The tax treatment for goodwill was properly applied. Assuming the company has a tax rate of 20% Instructions a. Prepare the journal entries in 2021 to correct the books where necessary, assuming that the 2021 books have not been closed. b. Identify the type of change for each of the items.

The first audit of the books of Swift Limited was recently carried out for the year ended December 31, 2021. Swift follows IFRS. In examining the books, the auditor found that certain items had been overlooked or might have been incorrectly handled in the past: 1. At the beginning of 2019, the company purchased a machine for $480,000 (residual value of $30,000) that had a useful life of six years. The bookkeeper used straight-line depreciation but failed to deduct the residual value in calculating the depreciation base for the three years. 2. Swift purchased another company early in 2017 and recorded goodwill of $450,000 Swift amortized $20,000 of goodwill in 2017, and $40,000 in each subsequent year. The tax treatment for goodwill was properly applied. Assuming the company has a tax rate of 20% Instructions a. Prepare the journal entries in 2021 to correct the books where necessary, assuming that the 2021 books have not been closed. b. Identify the type of change for each of the items.

Auditing: A Risk Based-Approach to Conducting a Quality Audit

10th Edition

ISBN:9781305080577

Author:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg

Publisher:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg

Chapter12: Auditing Long-lived Assets: Acquisition, Use, Impairment, And Disposal

Section: Chapter Questions

Problem 52RSCQ

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Soon after December 31, 2019, the auditor requested a depreciation schedule for trucks of Jarrett Trucking Company, showing the additions, retirements, depreciation, and other data affecting the income of the company in the 4-year period 2016 to 2019, inclusive. The following data were in the Trucks account as of January 1, 2016: The Accumulated DepreciationTrucks account, previously adjusted to January 1,2016, and duly entered in the ledger, had a balance on that date of 16,460. This amount represented the straight-line depreciation on the four trucks from the respective dates of purchase, based on a 5-year life and no residual value. No debits had been made to this account prior to January 1, 2016. Transactions between January 1,2017, and December 31, 2019, and their record in the ledger were as follows: 1. July 1, 2016: Truck no. 1 was sold for 1,000 cash. The entry was a debit to Cash and a credit to Trucks, 1,000. 2. January 1, 2017: Truck no. 3 was traded for a larger one (no. 5) with a 5-year life. The agreed purchase price was 12,000. Jarrett paid the other company 1,780 cash on the transaction. The entry was a debit to Trucks, 1,780, and a credit to Cash, 1,780. 3. July 1, 2018: Truck no. 4 was damaged in a wreck to such an extent that it was sold as junk for 50 cash. Jarrett received 950 from the insurance company. The entry made by the bookkeeper was a debit to Cash, 1,000, and credits to Miscellaneous Revenue, 50, and Trucks, 950, 4. July 1, 2018: A new truck (no. 6) was acquired for 20,000 cash and debited at that amount to the Trucks account. The truck has a 5-year life. Entries for depreciation had been made at the close of each year as follows: 2016, 8,840; 2017, 5,436; 2018, 4,896; 2019, 4,356. Required: 1. Next Level For each of the 4 years, calculate separately the increase or decrease in earnings arising from the companys errors in determining or entering depreciation or in recording transactions affecting trucks. 2. Prove your work by one compound journal entry as of December 31, 2019; the adjustment of the Trucks account is to reflect the correct balances, assuming that the books have not been closed for 2019.
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