Log out Go to App
Go to App

Learning Materials

Features

Discover

Chapter 22: 7P (page 1318)

You have been assigned to examine the financial statements of Zarle Company for the year ended December 31, 2017. You discover the following situations.

1. Depreciation of \(3,200 for 2017 on delivery vehicles was not recorded.

2. The physical inventory count on December 31, 2016, improperly excluded merchandise costing \)19,000 that had been temporarily stored in a public warehouse. Zarle uses a periodic inventory system.

3. A collection of \(5,600 on account from a customer received on December 31, 2017, was not recorded until January 2, 2018.

4. In 2017, the company sold for \)3,700 fully depreciated equipment that originally cost \(25,000. The company credited the proceeds from the sale to the Equipment account.

5. During November 2017, a competitor company filed a patent-infringement suit against Zarle claiming damages of \)220,000. The company’s legal counsel has indicated that an unfavorable verdict is probable and a reasonable estimate of the court’s award to the competitor is \(125,000. The company has not reflected or disclosed this situation in the financial statements.

6. Zarle has a portfolio of trading investments. No entry has been made to adjust to market. Information on cost and fair value is as follows. Cost Fair Value December 31, 2016 \)95,000 \(95,000 December 31, 2017 \)84,000 \(82,000

7. At December 31, 2017, an analysis of payroll information shows accrued salaries of \)12,200. The Salaries and Wages Payable account had a balance of \(16,000 at December 31, 2017, which was unchanged from its balance at December 31, 2016.

8. A large piece of equipment was purchased on January 3, 2017, for \)40,000 and was charged to Maintenance and Repairs Expense. The equipment is estimated to have a service life of 8 years and no residual value. Zarle normally uses the straight-line depreciation method for this type of equipment.

9. A \(12,000 insurance premium paid on July 1, 2016, for a policy that expires on June 30, 2019, was charged to insurance expense.

10. A trademark was acquired at the beginning of 2016 for \)50,000. No amortization has been recorded since its acquisition. The maximum allowable amortization period is 10 years.

Instructions

Assume the trial balance has been prepared but the books have not been closed for 2017. Assuming all amounts are material, prepare journal entries showing the adjustments that are required. (Ignore income tax considerations.)

Short Answer

Expert verified

The trial balance is a financial worksheet that shows debit and credit sides, and all the adjustment journal entries are passed.

Step by step solution

01

Definition of trial Balance

The trial balance is defined as the financial worksheet into which the balance of all the ledger accounts is transferred to check the accuracy.

02

Journal entries

Date

Particulars

Debit ($)

Credit ($)

1.

Depreciation

3,200

Delivery vehicles

3,200

(Being adjustment recorded)

2.

Closing Stock

19,000

Trading account

19,000

(Being adjustment recorded)

3.

Bank

5,600

Customer Account

5,600

(Being adjustment recorded)

4.

Equipment

3,700

Profit on sale of equipment

3,700

(Being adjustment recorded)

5.

No entry

6.

Fair Value Adjustment

2,000

Investment Account

2,000

(Being adjustment recorded)

7.

Salaries and wages expense

12,200

Salaries and wages payable

12,200

(Being adjustment recorded)

8.

Equipment

40,000

Maintenance and repair

40,000

(Being adjustment recorded)

Depreciation

5,000

Accumulated depreciation

5,000

9.

Prepaid Insurance

6,000

Insurance expense

6,000

(Being adjustment recorded)

10.

Amortization

10,000

Trademark

10,000

(Being adjustment recorded)

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

The following are three independent, unrelated sets of facts relating to accounting changes.

Situation 1: Sanford Company is in the process of having its first audit. The company has used the cash basis of accounting for revenue recognition. Sanford president, B. J. Jimenez, is willing to change to the accrual method of revenue recognition.

Situation 2: Hopkins Co. decides in January 2018 to change from FIFO to weighted-average pricing for its inventories.

Situation 3: Marshall Co. determined that the depreciable lives of its fixed assets are too long at present to fairly match the cost of the fixed assets with the revenue produced. The company decided at the beginning of the current year to reduce the depreciable lives of all of its existing fixed assets by 5 years.

Instructions

For each of the situations described, provide the information indicated below.

(a) Type of accounting change.

(b) Manner of reporting the change under current generally accepted accounting principles, including a discussion where applicable of how amounts are computed.

(c) Effect of the change on the balance sheet and income statement

On January 1, 2017, Millay Inc. paid \(700,000 for 10,000 shares of Genso Company’s voting common stock, which was a 10% interest in Genso. At that date, the net assets of Gensototaled \)6,000,000. The fair values of all of Genso’s identifiable assets and liabilities were equal to their book values. Millay does not have the ability to exercise significant influence over the operating and financial policies of Genso. Millay received dividends of \(1.50 per share from Genso on October 1, 2017. Genso reported net income of \)550,000 for the year ended December 31, 2017.

On July 1, 2018, Millay paid \(2,325,000 for 30,000 additional shares of Genso Company’s voting common stock which represents a 30% investment in Genso. The fair values of all of Genso’s identifiable assets net of liabilities were equal to their book values of \)6,550,000. As a result of this transaction, Millay has the ability to exercise significant influence over the operating and financial policies of Genso. Millay received dividends of \(2.00 per share from Genso on April 1, 2018, and \)2.50 per share on October 1, 2018. Genso reported net income of \(650,000 for the year ended December 31, 2018, and \)350,000 for the 6 months ended December 31, 2018.

Instructions (For both purchases, assume any excess of cost over book value is due to goodwill.)

(a) Prepare a schedule showing the income or loss before income taxes for the year ended December 31, 2017, that Millay should report from its investment in Genso in its income statement issued in March 2018.

(b) During March 2019, Millay issues comparative financial statements for 2017 and 2018. Prepare schedules showing the income or loss before income taxes for the years ended December 31, 2017 and 2018, that Millay should report from its investment in Genso.

Gordon Company started operations on January 1, 2012, and has used the FIFO method of inventory valuation since its inception. In 2018, it decides to switch to the average-cost method. You are provided with the following information.

Net Income Retained Earnings (Ending Balance) Under FIFO Under Average-Cost Under FIFO 2012 \(100,000 \) 90,000 $100,000 2013 70,000 65,000 160,000 2014 90,000 80,000 235,000 2015 120,000 130,000 340,000 2016 300,000 290,000 590,000 2017 305,000 310,000 780,000

Instructions (a) What is the beginning retained earnings balance at January 1, 2014, if Gordon prepares comparative financial statements starting in 2014?

(b) What is the beginning retained earnings balance at January 1, 2017, if Gordon prepares comparative financial statements starting in 2017?

(c) What is the beginning retained earnings balance at January 1, 2018, if Gordon prepares single-period financial statements for 2018?

(d) What is the net income reported by Gordon in the 2017 income statement if it prepares comparative financial statements starting with 2015?

Briefly describe some of the similarities and differences between GAAP and IFRS with respect to reporting accounting changes.

Penn Company is in the process of adjusting and correcting its books at the end of 2017. In reviewing its records, the following information is compiled.

1. Penn has failed to accrue sales commissions payable at the end of each of the last 2 years, as follows. December 31, 2016 \(3,500 December 31, 2017 \)2,500

2. In reviewing the December 31, 2017, inventory, Penn discovered errors in its inventory-taking procedures that have caused inventories for the last 3 years to be incorrect, as follows. December 31, 2015 Understated \(16,000 December 31, 2016 Understated \)19,000 December 31, 2017 Overstated \( 6,700 Penn has already made an entry that established the incorrect December 31, 2017, inventory amount.

3. At December 31, 2017, Penn decided to change the depreciation method on its office equipment from double-decliningbalance to straight-line. The equipment had an original cost of \)100,000 when purchased on January 1, 2015. It has a 10- year useful life and no salvage value. Depreciation expense recorded prior to 2017 under the double-declining-balance method was \(36,000. Penn has already recorded 2017 depreciation expense of \)12,800 using the double-declining-balance method. 4. Before 2017, Penn accounted for its income from long-term construction contracts on the completed-contract basis. Early in 2017, Penn changed to the percentage-of-completion basis for accounting purposes. It continues to use the completedcontract method for tax purposes. Income for 2017 has been recorded using the percentage-of-completion method. The following information is available.

Pretax Income

Percentage-of-Completion Completed-Contract

Prior to 2017 \(150,000 \)105,000

2017 60,000 20,000

Instructions

Prepare the journal entries necessary at December 31, 2017, to record the above corrections and changes. The books are still open for 2017. The income tax rate is 40%. Penn has not yet recorded its 2017 income tax expense and payable amounts so current-year tax effects may be ignored. Prior-year tax effects must be considered in item 4.
See all solutions

Recommended explanations on Business Studies Textbooks

Organizational Communication

Read Explanation

Change Management

Read Explanation

Nature of Business

Read Explanation

Managers

Read Explanation

Business Case Studies

Read Explanation

Business Operations

Read Explanation
View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free