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Chapter 22: Q17. (page 1312)

(Error Analysis and Correcting Entry) The reported net incomes for the first 2 years of Sandra Gustafson Products, Inc., were as follows: 2017, \(147,000; 2018, \)185,000. Early in 2019, the following errors were discovered.

1. Depreciation of equipment for 2017 was overstated \(17,000.

2. Depreciation of equipment for 2018 was understated \)38,500.

3. December 31, 2017, inventory was understated \(50,000.

4. December 31, 2018, inventory was overstated \)16,200.

Instructions

Prepare the correcting entry necessary when these errors are discovered. Assume that the books are closed. (Ignore income tax considerations.)

Short Answer

Expert verified

The adjustment to retained earnings will be $37,700, and journal entries will be retained earnings will be debited, and inventory and Accumulated depreciation will be credited.

Step by step solution

01

Calculation of Adjustment amount

Adjustmentamount=Overstatement2018Inventory-Overstatement2017depreciation+Understatement2018depreciation=16,200-17,000+38,500=$37,700

02

Journal Entry for the adjustment

Date

Particulars

Debit ($)

Credit ($)

Retained Earnings

37,700

Inventory

16,200

Accumulated Depreciation Equipment

21,500

(Being adjustment to retained earnings recorded)

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Most popular questions from this chapter

Define a change in estimate and provide an illustration. When is a change in accounting estimate effected by a change in accounting principle?

Under IFRS, the retrospective approach should not be used if:

(a) retrospective application requires assumptions about management’s intent in a prior period.

(b) the company does not have trained staff to perform the analysis.

(c) the effects of the change have counterbalanced.

(d) the effects of the change have not counterbalanced.

Access the glossary (“Master Glossary”) to answer the following.

(a) What is a change in accounting estimate?

(b) What is a change in accounting principle?

(c) What is a restatement?

(d) What is the definition of “retrospective application”?

(Analysis of Various Accounting Changes and Errors) Katherine Irving, controller of Lotan Corp., is aware of a pronouncement on accounting changes. After reading the pronouncement, she is confused about what action should be taken on the following items related to Lotan Corp. for the year 2017.

1. In 2017, Lotan decided to change its policy on accounting for certain marketing costs. Previously, the company had chosen to defer and amortize all marketing costs over at least 5 years because Lotan believed that a return on these expenditures did not occur immediately. Recently, however, the time differential has considerably shortened, and Lotan is now expensing the marketing costs as incurred.

2. In 2017, the company examined its entire policy relating to the depreciation of plant equipment. Plant equipment had normally been depreciated over a 15-year period, but recent experience has indicated that the company was incorrect in its estimates and that the assets should be depreciated over a 20-year period.

3. One division of Lotan Corp., Hawthorne Co., has consistently shown an increasing net income from period to period. On closer examination of its operating statement, it is noted that bad debt expense and inventory obsolescence charges are much lower than in other divisions. In discussing this with the controller of this division, it has been learned that the controller has increased his net income each period by knowingly making low estimates related to the write-off of receivables and inventory.

4. In 2017, the company purchased new machinery that should increase production dramatically. The company has decided to depreciate this machinery on an accelerated basis, even though other machinery is depreciated on a straight-line basis.

5. All equipment sold by Lotan is subject to a 3-year warranty. It has been estimated that the expense ultimately to be incurred on these machines is 1% of sales. In 2017, because of a production breakthrough, it is now estimated that ½ of 1% of sales is sufficient. In 2015 and 2016, warranty expense was computed as \(64,000 and \)70,000, respectively. The company now believes that these warranty costs should be reduced by 50%.

6. In 2017, the company decided to change its method of inventory pricing from average-cost to the FIFO method. The effect of this change on prior years is to increase 2015 income by \(65,000 and increase 2016 income by \)20,000.

Instructions Katherine Irving has come to you, as her CPA, for advice about the situations above. Prepare a report, indicating the appropriate accounting treatment that should be given for each of these situations.

Tedesco Company changed depreciation methods in 2017 from double-declining-balance to straight-line. Depreciation prior to 2017 under double-declining-balance was \(90,000, whereas straight-line depreciation prior to 2017 would have been \)50,000. Tedesco’s depreciable assets had a cost of \(250,000 with a \)40,000 salvage value, and an 8-year remaining useful life at the beginning of 2017. Prepare the 2017 journal entries, if any, related to Tedesco’s depreciable assets
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