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Chapter 22: Q15E. (page 1312)

(Error Correction Entries) The first audit of the books of Bruce Gingrich Company was made for the year ended December 31, 2018. In examining the books, the auditor found that certain items had been overlooked or incorrectly handled in the last 3 years.

These items are:

1. At the beginning of 2016, the company purchased a machine for \(510,000 (salvage value of \)51,000) that had a useful life of 6 years. The bookkeeper used straight-line depreciation but failed to deduct the salvage value in computing the depreciation base for the 3 years.

2. At the end of 2017, the company failed to accrue sales salaries of \(45,000.

3. A tax lawsuit that involved the year 2016 was settled late in 2018. It was determined that the company owed an additional \)85,000 in taxes related to 2016. The company did not record a liability in 2016 or 2017 because the possibility of loss was considered remote, and charged the \(85,000 to a loss account in 2018.

4. Gingrich Company purchased a copyright from another company early in 2016 for \)45,000. Gingrich had not amortized the copyright because its value had not diminished. The copyright has a useful life at purchase of 20 years.

5. In 2018, the company wrote off $87,000 of inventory considered to be obsolete; this loss was charged directly to Retained Earnings. Instructions Prepare the journal entries necessary in 2018 to correct the books, assuming that the books have not been closed. Disregard effects of corrections on income tax.

Short Answer

Expert verified

All the entries are passed for the correction from step 1 to step 5.

Step by step solution

01

First Error

Date

Particulars

Debit ($)

Credit ($)

Accumulated depreciation- Equipment

25,500

Depreciation Expense

8,500

Retained earnings

17,000

(being error corrected)

2013-2014 ($)

2015 ($)

Depreciation Taken

170,000

85,000

Less Depreciation (correct)

153,000

76,500

17,000

8,500

02

Second Error

Date

Particulars

Debit ($)

Credit ($)

Retained Earnings

45,000

Salaries and wages payable

45,000

(Being error corrected)

03

Third error

No entry is required

04

Fourth error

Date

Particulars

Debit ($)

Credit ($)

Amortization expense

2,250

Retained earnings

4,500

Copyrights

6,750

(being error corrected)

05

Fifth Error

Date

Particulars

Debit ($)

Credit ($)

Write off of inventories

87,000

Retained earnings

87,000

(being error corrected

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Most popular questions from this chapter

What is the indirect effect of a change in accounting policy? Briefly describe the approach to reporting the indirect effects of a change in accounting policy under IFRS.

Kathleen Cole Inc. acquired the following assets in January of 2015.

Equipment, estimated service life, 5 years; salvage value, \(15,000 \)525,000

Building, estimated service life, 30 years; no salvage value $693,000

The equipment has been depreciated using the sum-of-the-years’-digits method for the first 3 years for financial reporting purposes. In 2018, the company decided to change the method of computing depreciation to the straight-line method for the equipment, but no change was made in the estimated service life or salvage value. It was also decided to change the total estimated service life of the building from 30 years to 40 years, with no change in the estimated salvage value. The building is depreciated on the straight-line method.

Instructions (a) Prepare the general journal entry to record depreciation expenses for the equipment in 2018.

(b) Prepare the journal entry to record depreciation expenses for the building in 2018. (Round all computations to two decimal places.)

(Analysis of Various Accounting Changes and Errors) Mathys Inc. has recently hired a new independent auditor, Karen Ogleby, who says she wants “to get everything straightened out.” Consequently, she has proposed the following accounting changes in connection with Mathys Inc.’s 2017 financial statements.

1. At December 31, 2016, the client had a receivable of \(820,000 from Hendricks Inc. on its balance sheet. Hendricks Inc. has gone bankrupt, and no recovery is expected. The client proposes to write off the receivable as a prior period item.

2. The client proposes the following changes in depreciation policies.

(a) For office furniture and fixtures, it proposes to change from a 10-year useful life to an 8-year life. If this change had been made in prior years, retained earnings at December 31, 2016, would have been \)250,000 less. The effect of the change on 2017 income alone is a reduction of \(60,000.

(b) For its new equipment in the leasing division, the client proposes to adopt the sum-of-the-years’-digits depreciation method. The client had never used SYD before. The first year the client operated a leasing division was 2017. If straight-line depreciation were used, 2017 income would be \)110,000 greater.

3. In preparing its 2016 statements, one of the client’s bookkeepers overstated ending inventory by \(235,000 because of a mathematical error. The client proposes to treat this item as a prior period adjustment.

4. In the past, the client has spread preproduction costs in its furniture division over 5 years. Because its latest furniture is of the “fad” type, it appears that the largest volume of sales will occur during the first 2 years after introduction. Consequently, the client proposes to amortize preproduction costs on a per-unit basis, which will result in expensing most of such costs during the first 2 years after the furniture’s introduction. If the new accounting method had been used prior to 2017, retained earnings at December 31, 2016, would have been \)375,000 less.

5. For the nursery division, the client proposes to switch from FIFO to LIFO inventories because it believes that LIFO will provide a better matching of current costs with revenues. The effect of making this change on 2017 earnings will be an increase of \(320,000. The client says that the effect of the change on December 31, 2016, retained earnings cannot be determined.

6. To achieve an appropriate recognition of revenues and expenses in its building construction division, the client proposes to switch from the completed-contract method of accounting to the percentage-of-completion method. Had the percentage-of-completion method been employed in all prior years, retained earnings at December 31, 2016, would have been \)1,075,000 greater.

Instructions

(a) For each of the changes described above, decide whether:

(1) The change involves an accounting principle, accounting estimate, or correction of an error.

(2) Restatement of opening retained earnings is required.

(b) What would be the proper adjustment to the December 31, 2016, retained earnings?

How might differences in presentation of comparative data under GAAP and IFRS affect adoption of IFRS by U.S. companies?

(Accounting for Accounting Changes and Errors) Listed below are various types of accounting changes and errors.

______ 1. Change in a plant asset’s salvage value.

______ 2. Change due to overstatement of inventory.

______ 3. Change from sum-of-the-years’-digits to straight-line method of depreciation.

______ 4. Change from presenting unconsolidated to consolidated financial statements.

______ 5. Change from LIFO to FIFO inventory method.

______ 6. Change in the rate used to compute warranty costs.

______ 7. Change from an unacceptable accounting principle to an acceptable accounting principle.

______ 8. Change in a patent’s amortization period.

______ 9. Change from completed-contract to percentage-of-completion method on construction contracts.

______ 10. Change from FIFO to average-cost inventory method.

Instructions For each change or error, indicate how it would be accounted for using the following code letters:

(a) Accounted for prospectively.

(b) Accounted for retrospectively.

(c) Neither of the above.
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