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Chapter 22: Q10Q. (page 1306)

Parsons Inc. has proposed a change from one inventory accounting method to another for financial reporting purposes. The auditor indicates that a change would be permitted only if it is to a preferable method. What difficulties develop in assessing preferability?

Short Answer

Expert verified

An auditor is a person who verifies and checks financial information. The companies and auditors face the difficulty of wasting resources in the process of assessing the preferability of the method.

Step by step solution

01

Definition of Auditor

The auditor is the person who has the authorization to review and verify the accuracy of the financial statements of the company

02

Difficulties faced

The company or the auditor of the company may face various difficulties in assessing preferability, such as:

They have to consider the cost and benefits of each method, which requires them to prepare financial statements using various methods, which increases the cost and requires so much time.

This leads to the wastage of the company's resources, which can be used in any other business operation of the business.

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Most popular questions from this chapter

Sesame Company purchased a computer system for \(74,000 on January 1, 2016. It was depreciated based on a 7-year life and an \)18,000 salvage value. On January 1, 2018, Sesame revised these estimates to a total useful life of 4 years and a salvage value of $10,000. Prepare Sesame’s entry to record 2018 depreciation expense. Sesame uses straight-line depreciation.

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

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 –0–

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.

Discuss and illustrate how a correction of an error in previously issued financial statements should be handled.

On March 5, 2018, you were hired by Hemingway Inc., a closely held company, as a staff member of its newly created internal auditing department. While reviewing the company’s records for 2016 and 2017, you discover that no adjustments have yet been made for the following items. Items

1. Interest income of \(14,100 was not accrued at the end of 2016. It was recorded when received in February 2017.

2. A computer costing \)4,000 was expensed when purchased on July 1, 2016. It is expected to have a 4-year life with no salvage value. The company typically uses straight-line depreciation for all fixed assets.

3. Research and development costs of \(33,000 were incurred early in 2016. They were capitalized and were to be amortized over a 3-year period. Amortization of \)11,000 was recorded for 2016 and \(11,000 for 2017.

4. On January 2, 2016, Hemingway leased a building for 5 years at a monthly rental of \)8,000. On that date, the company paid the following amounts, which were expensed when paid. Security deposit \(20,000 First month’s rent 8,000 Last month’s rent 8,000 \)36,000

5. The company received \(36,000 from a customer at the beginning of 2016 for services that it is to perform evenly over a 3-year period beginning in 2016. None of the amount received was reported as unearned revenue at the end of 2016.

6. Merchandise inventory costing \)18,200 was in the warehouse at December 31, 2016, but was incorrectly omitted from the physical count at that date. The company uses the periodic inventory method.

Instructions

Indicate the effect of any errors on the net income figure reported on the income statement for the year ending December 31, 2016, and the retained earnings figure reported on the balance sheet at December 31, 2017. Assume all amounts are material, and ignore income tax effects. Using the following format, enter the appropriate dollar amounts in the appropriate columns. Consider each item independent of the other items. It is not necessary to total the columns on the grid.
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