At the end of 2020, while auditing Sandlin Company’s books, before the books have been closed, you find the following items:
- a. A building with a 30-year life (no residual value,
depreciated using the straight-line method) was purchased on January 1, 2020, by issuing a $90,000 non-interest-bearing, 4-year note. The entry made to record the purchase was a debit to Building and a credit to Notes Payable for $90,000; 12% is a fair rate of interest on the note. - b. The inventory at the end of 2020 was found to be overstated by $15,000. At the same time, it was discovered that the inventory at the end of 2019 had been overstated by $35,000. The company uses the perpetual inventory system.
- c. For the last 3 years, the company has failed to accrue salaries and w-ages. The correct amounts at the end of each year were: 2018, $12,000; 2019, $18,000; and 2020, $10,000.
Required:
- 1. Prepare
journal entries to correct the errors. Ignore income taxes. - 2. Assume, instead, that the company discovered the errors after it had closed the books. Prepare journal entries to correct the errors. Ignore income taxes.
1.
Prepare correct journal entries for Company S, if the errors are discovered before the books are closed, at the end of 2020.
Explanation of Solution
Errors: The comparability and consistency of the financial statements decreases when a company records arithmetic mistakes, or errors. Such errors do require adjustments to make the financial information more reliable, and more relevant.
Journal entry: Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.
Debit and credit rules:
- Debit an increase in asset account, increase in expense account, decrease in liability account, and decrease in stockholders’ equity accounts.
- Credit decrease in asset account, increase in revenue account, increase in liability account, and increase in stockholders’ equity accounts.
Prepare correct journal entries for Company S, if the errors are discovered before the books are closed, at the end of 2020.
a.
Journal entry to correct the failure to record discount on note payable:
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | ||
Discount on Note Payable | 32,803 | |||||
Building | 32,803 | |||||
(Record discount on notes payable) |
Table (1)
Description:
- Discount on Note Payable is a contra-liability account to Notes Payable account. The contra-liability account increased, and an increase in contra-liability is debited.
- Building is an asset account. The asset value decreased due to discount, and a decrease in asset is credited.
Working Note 1:
Compute discount on note payable value.
Journal entry to correct the erroneous depreciation expense:
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | ||
Accumulated Depreciation–Building | 1,093 | |||||
Depreciation Expense–Building | 1,093 | |||||
(Record reduction in depreciation expense) |
Table (2)
Description:
- Accumulated Depreciation–Building is a contra-asset account. Since the depreciation expense was overstated by $1,093, the accumulated depreciation is also overstated. Hence, the contra-asset account is debited to decrease the expense value.
- Depreciation Expense is an expense account. Since the depreciation expense was overstated by $1,093, the expense account is credited to decrease the expense value.
Working Note 2:
Compute overstated (understated) depreciation expense value (Refer to Working Note 1 for value and computation of discount on note payable).
Journal entry to correct the failure to record interest expense:
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | ||
Interest Expense | 6,864 | |||||
Discount on Note Payable | 6,864 | |||||
(Record interest expense on notes payable) |
Table (3)
Description:
- Interest Expense is an expense account. Since expenses decrease equity, equity value is decreased, and a decrease in equity is debited.
- Discount on Note Payable is a contra-liability account to Notes Payable account. The discount is amortized, hence the contra-liability account value decreased, and a decrease in contra-liability is credited.
Working Note 3:
Compute interest expense.
b.
Journal entry to correct the 2019 overstated inventory:
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | ||
Retained Earnings | 35,000 | |||||
Cost of Goods Sold | 35,000 | |||||
(Record reduction in overstated retained earnings) |
Table (4)
Description:
- Retained Earnings is an equity account. Since ending inventory in 2019 was overstated, cost of goods sold of 2019 were understated, and hence, revenue is overstated in 2019. The retained earnings account is debited to decrease the overstated equity.
- Cost of Goods Sold is an equity account. Since cost of goods sold of 2020 was overstated, the expense account is credited to decrease the overstated equity.
Journal entry to correct the 2020 overstated inventory:
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | ||
Cost of Goods Sold | 15,000 | |||||
Inventory | 15,000 | |||||
(Record reduction in overstated inventory and increase in understated cost of goods sold) |
Table (5)
Description:
- Cost of Goods Sold is an equity account. Since ending inventory in 2020 was overstated, cost of goods sold of 2020 were understated. The expense account is debited to increase the understated equity.
- Inventory is an asset account. Since ending inventory in 2020 was overstated, the value of assets increased. The asset account is credited to decrease the overstated asset account.
c.
Journal entry to correct the 2019 failure to accrue salaries and wages:
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | ||
Retained Earnings | 18,000 | |||||
Salaries and Wages Expense | 18,000 | |||||
(Record reduction in overstated retained earnings) |
Table (6)
Description:
- Retained Earnings is an equity account. Since accrued wages were not recorded and wages expense was not included in the computation of net income, the net income of 2019 was overstated. Hence, the equity account is debited to decrease the overstated value.
- Salaries and Wages Expense is an equity account. Since salaries and wages expense of $18,000 which belong to 2019 were recorded in 2020, the expenses of 2020 was overstated. The expense account is credited to decrease the overstated equity.
Journal entry to correct the 2020 failure to accrue salaries and wages:
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | ||
Salaries and Wages Expense | 10,000 | |||||
Salaries and Wages Payable | 10,000 | |||||
(Record accrued salaries and wages expense) |
Table (7)
Description:
- Salaries and Wages Expense is an expense account. Since expenses decrease equity, equity value is decreased, and a decrease in equity is debited.
- Salaries and Wages Payable is a liability account. Since the liability to pay salaries and wages expense has increased, liability increased, and an increase in liability is credited.
2.
Prepare correct journal entries for Company S, if the errors are discovered after the books are closed, at the end of 2020.
Explanation of Solution
Prepare correct journal entries for Company S, if the errors are discovered after the books are closed, at the end of 2020.
a.
Journal entry to correct the failure to record discount on note payable, accumulated depreciation, and interest expense (Refer to Requirement 1-(a) for all the computations):
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | ||
Discount on Note Payable | 25,939 | |||||
Accumulated Depreciation–Building | 1,093 | |||||
Retained Earnings | 5,771 | |||||
Building | 32,803 | |||||
(Record discount on notes payable, accumulated depreciation) |
Table (8)
Description:
- Discount on Note Payable is a contra-liability account to Notes Payable account. The contra-liability account increased, and an increase in contra-liability is debited with the total of discount of $32,803, less discount of $6,864 amortized in 2020.
- Accumulated Depreciation–Building is a contra-asset account. Since the depreciation expense was overstated by $1,093, the accumulated depreciation is also overstated. Hence, the contra-asset account is debited to decrease the expense value.
- Retained Earnings is an equity account. Since understatement of $6,864 of interest expense and overstatement of $1,093 of depreciation expense overstated the net income of 2020. Hence, the equity account is debited by the difference of $5,771 to decrease the overstated value.
- Building is an asset account. The asset value decreased due to discount, and a decrease in asset is credited.
b.
The error of 2019 overstated inventory would be counterbalanced at the end of 2020.
Journal entry to correct the 2020 overstated inventory:
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | ||
Retained Earnings | 15,000 | |||||
Inventory | 15,000 | |||||
(Record reduction in overstated inventory and increase in understated cost of goods sold) |
Table (9)
Description:
- Retained Earnings is an equity account. Since ending inventory in 2020 was overstated, cost of goods sold of 2020 was understated, and hence, revenue is overstated in 2020. The retained earnings account is debited to decrease the overstated equity.
- Inventory is an asset account. Since ending inventory in 2020 was overstated, the value of assets increased. The asset account is credited to decrease the overstated asset account.
c.
The errors of 2018 and 2019 un-accrued expenses would be counterbalanced at the end of 2019 and 2020 respectively.
Journal entry to correct the 2020 failure to accrue salaries and wages:
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | ||
Retained Earnings | 10,000 | |||||
Salaries and Wages Payable | 10,000 | |||||
(Record accrued salaries and wages expense) |
Table (10)
Description:
- Retained Earnings is an equity account. Since accrued wages were not recorded and wages expense was not included in the computation of net income, the net income of 2020 was overstated. Hence, the equity account is debited to decrease the overstated value.
- Salaries and Wages Payable is a liability account. Since the liability to pay salaries and wages expense has increased, liability increased, and an increase in liability is credited.
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Chapter 22 Solutions
INTERM.ACCT.:REPORTING...-CENGAGENOWV2
- During 2019, Ryel Companys controller asked you to prepare correcting journal entries for the following three situations: 1. Machine A was purchased for 50,000 on January 1, 2014. Straight-line depreciation has been recorded for 5 years, and the Accumulated Depreciation account has a balance of 25,000. The estimated residual value remains at 5,000, but the service life is now estimated to be 1 year longer than estimated originally. 2. Machine B was purchased for 40,000 on January 1, 2017. It had an estimated residual value of 5,000 and an estimated service life of 10 years. it has been depreciated under the double-declining-balance method for 2 years. Now, at the beginning of the third year, Ryel has decided to change to the straight-line method. 3. Machine C was purchased for 20,000 on January 1, 2018, Double-declining-balance depreciation has been recorded for 1 year. The estimated residual value of the machine is 2,000 and the estimated service life is 5 years. The computation of the depreciation erroneously included the estimated residual value. Required: Prepare any necessary correcting journal entries for each situation. Also prepare the journal entry necessary for each situation to record depreciation expense for 2019.arrow_forwardAt the beginning of 2020, Holden Companys controller asked you to prepare correcting entries for the following three situations: 1. Machine X was purchased for 100,000 on January 1, 2015. Straight-line depreciation has been recorded for 5 years, and the Accumulated Depreciation account has a balance of 45,000. The estimated residual value remains at 10,000, but the service life is now estimated to be 1 year longer than originally estimated. 2. Machine Y was purchased for 40,000 on January 1, 2018. It had an estimated residual value of 4,000 and an estimated service life of 8 years. It has been depreciated under the sum-of-the-years-digits method for 2 years. Now, the company has decided to change to the straight-line method. 3. Machine Z was purchased for 80,000 on January 1, 2019. Double-declining-balance depreciation has been recorded for 1 year. The estimated residual value is 8,000 and the estimated service life is 5 years. The computation of the depreciation erroneously included the estimated residual value. Required: Prepare any necessary correcting journal entries for each situation. Also prepare the journal entry for each situation to record the depreciation for 2020. Ignore income taxes.arrow_forwardSoon 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.arrow_forward
- Kam Company purchased a machine on January 2, 2019, for 20,000. The machine had an expected life of 8 years and a residual value of 300. The double-declining-balance method of depreciation is used. Required: 1. Compute the depreciation expense for each year of the assets life and book value at the end of each year. 2. Assuming that the company has a policy of always changing to the straight-line method at the midpoint of the assets life, compute the depreciation expense for each year of the assets life. 3. Assuming that the company always changes to the straight-line method at the beginning of the year when the annual straight-line amount exceeds the double-declining-balance amount, compute the depreciation expense for each year of the assets life.arrow_forwardHathaway Company purchased a copying machine for 8,700 on October 1, 2019. The machines residual value was 500 and its expected service life was 5 years. Hathaway computes depreciation expense to the nearest whole month. Required: 1. Compute depredation expense (rounded to the nearest dollar) for 2019 and 2020 using the: a. straight-line method b. sum-of-the-years-digits method c. double-declining-balance method 2. Next Level Which method produces the highest book value at the end of 2020? 3. Next Level Which method produces the highest charge to income in 2020? 4. Next Level Over the life of the asset, which method produces the greatest amount of depreciation expense?arrow_forwardIt is February 16, 2020, and you are auditing Davenport Corporation's financial statements for 2019 (which will be issued in March 2020). You read in the newspaper that Travis Corporation, a major customer of Davenport, is in financial difficulty. Included in Davenports accounts receivable is 50,000 (a material amount) owed to it by Travis. You approach Jim Davenport, president, with this information and suggest that a reduction of accounts receivable and recognition of a loss for 2019 might be appropriate. Jim replies, Why should we make an adjustment? Ted Travis, the president of Travis Corporation, is a friend of mine; he will find a way to pay us, one way or another. Furthermore, this occurred in 2020, so lets wait and see what happens; we can always make an adjustment later this year. Our 2019 income and year-end working capital are not that high; our creditors and shareholders wouldnt stand for lower amounts than they already are. Required: From financial reporting and ethical perspectives, prepare a response to Jim Davenport regarding this issue.arrow_forward
- The following are independent errors: a. In January 2019, repair costs of 9,000 were debited to the Machinery account. At the beginning of 2019, the book value of the machinery was 100,000. No residual value is expected, the remaining estimated life is 10 years, and straight-line depreciation is used. b. All purchases of materials for construction contracts still in progress have been immediately expensed. It is discovered that the use of these materials was 10,000 during 2018 and 12,000 during 2019. c. Depreciation on manufacturing equipment has been excluded from manufacturing costs and treated as a period expense. During 2019, 40,000 of depreciation was accounted for in that manner. Production was 15,000 units during 2019, of which 3,000 remained in inventory at the end of the year. Assume there was no inventory at the beginning of 2019. Required: Prepare journal entries for the preceding errors discovered during 2020. Ignore income taxes.arrow_forwardOn May 10, 2019, Horan Company purchased equipment for 25,000. The equipment has an estimated service life of 5 years and zero residual value. Assume that the straight-line depreciation method is used. Required: Compute the depreciation expense for 2019 for each of the following four alternatives: 1. Horan computes depreciation expense to the nearest day. (Use 12 months of 30 days each and round the daily depreciation rate to 2 decimal places.) 2. Horan computes depreciation expense to the nearest month. Assets purchased in the first half of the month are considered owned for the whole month. 3. Horan computes depreciation expense to the nearest whole year. Assets purchased in the first half of the year are considered owned for the whole year. 4. Horan records one-half years depreciation expense on all assets purchased during the year.arrow_forwardDuring 2019, White Company determined that machinery previously depreciated over a 7-year life had a total estimated useful life of only 5 years. An accounting change was made in 2019 to reflect the change in estimate. If the change had been made in 2018, accumulated depreciation at December 31, 2018, would have been 1,600,000 instead of 1,200,000. As a result of this change, the 2019 depreciation expense was 100,000 greater than it would have been if no change were made. Ignoring income tax considerations, what is the proper amount of the adjustment to Whites January 1, 2019, balance of retained earnings? a. 0 b. 100,000 c. 280,000 d. 400,000arrow_forward
- On January 1, 2014, Klinefelter Company purchased a building for 520,000. The building had an estimated life of 20 years and an estimated residual value of 20,000. The company has been depreciating the building using straight-line depreciation. At the beginning of 2020, the following independent situations occur: a. The company estimates that the building has a remaining life of 10 years (for a total of 16 years). b. The company changes to the sum-of-the-years-digits method. c. The company discovers that it had ignored the estimated residual value in the computation of the annual depreciation each year. Required: For each of the independent situations, prepare all journal entries related to the building for 2020. Ignore income taxes.arrow_forwardOn December 31, 2019, Vail Company owned the following assets: Vail computes depreciation and amortization expense to the nearest whole year. During 2020, Vail engaged in the following transactions: Required: 1. Check the accuracy of the accumulated depreciation balances at December 31, 2019. Round to the nearest whole dollar in all requirements. 2. Prepare journal entries to record the preceding events in 2020, as well as the year-end recording of depreciation expense. 3. Prepare an Accumulated Depreciation account for each category of assets, enter the beginning balance, post the journal entries from Requirement 2, and compute the ending balance.arrow_forwardDinnell Company owns the following assets: In the year of acquisition and retirement of an asset, Dinnell records depreciation expense for one-half year. During 2020, Asset A was sold for 7,000. Required: Prepare the journal entries to record depreciation on each asset for 2017 through 2020 and the sale of Asset A. Round all answers to the nearest dollar.arrow_forward
- Intermediate Accounting: Reporting And AnalysisAccountingISBN:9781337788281Author:James M. Wahlen, Jefferson P. Jones, Donald PagachPublisher:Cengage Learning