ACC 928 Lecture Notes - Lecture 4: Net Income, Operating Expense, Retained Earnings
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Curello's Company's business year ends on December 31. Listedbelow are purchase transactions which occurred during the last fewdays of 2010 or during the first few days of 2011. The inventory,determined by physical count, was taken after the close of businesson December 31, 2010. The only adjusting entry recorded to date hasbeen to enter the December 31 physical inventory on the books andto remove the beginning inventory.
Instructions
(a) On the accompanying chart, indicate the effect of each ofthese transactions on the ending inventory and on reported netincome for 2010, by writing the words overstated, understated, orno effect in the appropriate column. Both columns must beanswered for each transaction.
(b)Prepare all necessary correcting entries for 2010.
(c)Indicate which of the correcting entries must be reversed in2011 by preparing the necessary reversing entries.
| 12/31/10 Physical Inventory | 2010 Income | ||||||
| 1 | An invoice for $8,000, terms f.o.b. shipping point, was receivedand entered December 30. The invoice shows that the merchandise wasshipped December 29, and the receiving report indicates themerchandise was received January 2. | ||||||
| 2 | An invoice for $300, terms f.o.b. shipping point, was receivedand entered December 30. The invoice shows that merchandise wasshipped December 29, and the receiving report shows the merchandisewas received December 31. | ||||||
| 3 | An invoice for $3,000, terms f.o.b. shipping point, was receivedand entered January 2. The invoice shows the merchandise wasshipped December 30, and the receiving report indicates themerchandise was received December 31. | ||||||
| 4 | An invoice for $500, terms f.o.b. destination, was received andentered December 30. The receiving report shows the merchandise wasreceived January 2. | ||||||
| 5 | An invoice for $500, terms f.o.b. destination, was received andentered December 29. The receiving report indicates that themerchandise was received December 31. | ||||||
| 6 | An invoice for $1,500, terms f.o.b. destination, was receivedand entered January 2. The receiving report indicates themerchandise was received December 31. | ||||||
| 7 | Merchandise costing $12,000 and with a selling price of $18,000was on consignment to Maris Distributing Company and was on thatcompany's premises on December 31. No entry has been made for theconsignment. | ||||||
The Diamond Glitter Company is in the process of preparing itsfinancial statements for 2012. Assume that no entries fordepreciation have been recorded in 2012. The following informationrelated to depreciation of fixed assets is provided to you.
1. The company purchased equipment on January 2, 2009, for$165000. At that time, the equipment had an estimated useful lifeof 7 years with a $25000 salvage value. The equipment isdepreciated on a straight-line basis. On January 2, 2012, as aresult of additional information, the company determined that theequipment has a remaining useful life of 3 years with a $15000salvage value.
2. During 2012, the company changed from thedouble-declining-balance method for its building to thestraight-line method. The building originally cost $625000. It hada useful life of 10 years and a salvage value of $50000. Thefollowing computations present depreciation on both bases for 2010and 2011. | ||||
2011 | 2010 | |||
Straight-line | $ 57,500 | $ 57,500 | ||
Declining-balance | $ 92,000 | $ 115,000 | ||
3. The company purchased a machine on July 1, 2010, at a cost of$450000. The machine has a salvage value of $25000 and a usefullife of 10 years. The company's bookkeeper recorded straight-linedepreciation in 2010 and 2011 but failed to consider the salvagevalue. Ignore Tax effect.
4. The company has failed to accrue sales commissions payable atthe end of each of the last 2 years, as follows. | ||||
December 31, 2011 | $ 5,400 | |||
December 31, 2012 | $ 4,600 | |||
5. In reviewing the December 31, 2011, inventory, the companydiscovered errors in its inventory-taking procedures that havecaused inventories for the last 3 years to be incorrect, asfollows. The company has already made an entry that established theincorrect December 31, 2012, inventory amount. | ||||
December 31, 2010 | Understated | $ 32,000 | ||
December 31, 2011 | Understated | $ 51,000 | ||
December 31, 2012 | Overstated | $ 9,500 | ||
6. At December 31, 2012, the company decided to change to thestraight-line depreciation method on its retail display equipmentfrom double-declining-balance. The equipment had an original costof $250000 when purchased on January 1, 2011. It has a salvagevalue of 0 and a 8-year useful life. Depreciation expense recordedprior to 2012 under the double-declining-balance method was $62500.The company has already recorded 2012 depreciation expense of$46875 using the double-declining-balance method.
7. Before the current year, the company accounted for its incomefrom long-term construction contracts on the completed-contractbasis. Early this year, the company changed to thepercentage-of-completion basis for accounting purposes, butcontinues to use the completed-contract method for tax purposes.Income for the current year has been recorded using the new method.Prior year tax effects must be considered. The followinginformation is available. | ||||
Pretax Income | ||||
Percentage-of-Completion | Completed-Contract | |||
Prior to 2012 | $320,000 | $180,000 | ||
2012 | $140,000 | $120,000 | ||
Required: | |||
Prepare the journal entries necessary at December 31, 2012 torecord the corrections and changes made to date related to theinformation provided. The books are still open for 2012. The incometax rate is 35%. The company has not yet recorded its 2012 incometax expense and payable amounts so current-year tax effects may beignored. | |||
