1.
Prepare the necessary correcting entries of Company B.
1.
Explanation of Solution
Research and development costs: It refers to the expenditures spent on research, development, improvement or introduction of new products, processes, a new patent or even a copyright, that a company expects to get benefits. It is reported under the intangible asset in the balance sheet.
Intangible assets: These are the long-term assets which are not physical in nature, but possess value. The intangible assets would be amortized over their definite useful life or limited useful life, and those with indefinite or unlimited lives are not amortized.
Prepare the necessary correcting entries of Company B as follows:
Date | Account Title and Explanation | Post Ref |
Debit ($) | Credit ($) | |
a. | Software development costs | 5,000 | |||
Selling and Administrative expense | 5,000 | ||||
(To record the capitalization of computer software costs) | |||||
b. | Allowance for doubtful accounts (1) | 23,000 | |||
Selling and Administrative ( | 23,000 | ||||
(To record the allowance for doubtful account) | |||||
c. | Inventories | 12,000 | |||
Cost of goods sold | 12,000 | ||||
(To record the inventory held by outside processor) | |||||
d. | Prepaid insurance | 3,000 | |||
Selling and Administrative expense | 3,000 | ||||
(To record the payment made for insurance in advance) | |||||
e. | Property, plant, and equipment | 24,000 | |||
2,400 | |||||
Repair & maintenance expense | 24,000 | ||||
Accumulated depreciation | 2,400 | ||||
(To record the repairs and maintenance of machine purchased and its depreciation) | |||||
f. | Research and development expense (3) | 120,000 | |||
Research and development costs | 120,000 | ||||
(To record the write off research and development costs in accordance with GAAP) | |||||
g. | Loss from litigation | 50,000 | |||
Estimated liability from lawsuit | 50,000 | ||||
(To record the loss from litigation) | |||||
h. | Income taxes payable (4) | 31,620 | |||
Income tax expense | 31,620 | ||||
(To record the provision for income taxes) |
Table (1)
Working note (1):
Compute the allowance for doubtful accounts:
Working note (2):
Compute the depreciation expense:
Working note (3):
Compute the research and development expense:
Working note (4):
Prepare a schedule showing the amount of income tax expense to be adjusted:
Particulars | Amount ($) | Amount ($) |
Unadjusted income before income taxes | 560,000 | |
Add: Adjustments increasing income | ||
Recognition of computer software | 5,000 | |
Allowance for doubtful accounts | 23,000 | |
Inventory at outside processor | 12,000 | |
Prepaid insurance | 3,000 | |
Repairs and maintenance expenses | 24,000 | 67,000 |
627,000 | ||
Less: Adjustments decreasing income | ||
Depreciation expense | 2,400 | |
Research and development expense | 120,000 | |
Estimated loss from lawsuit | 50,000 | 172,400 |
Adjusted income before income taxes (A) | 454,600 | |
Effective income tax rate (B) | 30% | |
Adjusted income tax expense | 136,380 | |
Less: Income tax expense per books | 168,000 | |
Adjustment to reduce income tax expense | (31,620) |
Table (2)
2.
Prepare a corrected balance sheet and a corrected income statement of Company B for the year ended November 30, 2016.
2.
Explanation of Solution
Balance sheet: This financial statement reports a company’s resources (assets) and claims of creditors (liabilities) and stockholders (stockholders’ equity) over those resources. The resources of the company are assets which include money contributed by stockholders and creditors. Hence, the main elements of the balance sheet are assets, liabilities, and
Income statement: The financial statement which reports revenues and expenses from business operations and the result of those operations as net income or net loss for a particular time period is referred to as income statement.
Prepare a corrected balance sheet of Company B for the year ended November 30, 2016
Corporation B | |
Balance Sheet | |
November 30, 2016 | |
Assets | |
Current Assets: | |
Cash | 180,000 |
| 480,000 |
Less: Allowance for doubtful accounts | (36,000) |
Inventories | 442,000 |
Prepaid insurance | 18,000 |
Total current assets | 1,084,000 |
Property, plant, and equipment | 450,000 |
Less: Accumulated depreciation | (42,400) |
Software development costs | 5,000 |
Total Assets | 1,496,600 |
Liabilities and Shareholders’ Equity | |
Current Liabilities | |
Accounts payable and accrued expenses | 592,000 |
Estimated liability from lawsuit | 50,000 |
Income taxes payable | 136,380 |
Total current liabilities (a) | 778,380 |
Shareholders’ Equity | |
Common stock | 400,000 |
| 318,220 |
Total shareholders’ equity (b) | 718,220 |
Total Liabilities and Shareholders’ Equity | 1,496,600 |
Table (3)
Prepare a corrected income statement of Company B for the year ended November 30, 2016 as follows:
Corporation B | ||
Balance Sheet | ||
For the year ended November 30, 2016 | ||
Particulars | Amount ($) | Amount ($) |
Net sales | 2,950,000 | |
Less: Operating expenses: | ||
Cost of goods sold | 1,634,000 | |
Selling and administrative | 619,000 | |
Depreciation | 42,400 | |
Research and development | 150,000 | |
Total expenses | 2,445,400 | |
Operating income | 504,600 | |
Less: Loss from litigation | (50,000) | |
Income before income taxes | 454,600 | |
Less: Income tax expense (4) | 136,380 | |
Net income | 318,220 |
Table (4)
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