Pig and Whistle Company, a smallcompany following ASPE, is adjusting and correcting its books atthe end of 2017. In reviewing its records, it compiles thefollowing information.
a) Pig and Whistle has failed to accrue sales commissionspayable at the end of each of the last two years, as follows:
Dec. 31, 2017
$6,200
Dec. 31, 2018
$3,800
B) In reviewing the December 31, 2018 inventory, Pig and Whistlediscovered errors in its inventory-taking procedures that havecaused inventories for the last three years to be incorrect, asfollows:
Dec. 31, 2016
Understated $21,000
Dec. 31, 2017
Understated $24,000
Dec. 31, 2018
Overstated $ 9,000
Pig and Whistle has already made anentry that recognized the incorrect December 31, 2018 inventoryamount.
C) In 2018, Pig and Whistle changed the depreciation method onits office equipment from double-declining-balance to straight-linebecause of a change in the pattern of benefits received. Theequipment had an original cost of $160,000 when purchased onJanuary 1, 2016. At that time, it was estimated that the officeequipment had an eightyear useful life and no residual value.Depreciation expense recorded prior to 2018 under thedouble-declining- balance method was $70,000. Pig and Whistle hasalready recorded 2018 depreciation expense of $22,500 using thedouble-declining-balance method.
D) Before 2018, Pig and Whistle accounted for its income fromlong-term construction contracts on the completed- contract basisbecause it was unable to reliably measure the degree of completionor the estimated costs to complete. Early in 2018, Pig and Whistlechanged to the percentage-of-completion basis for financialaccounting purposes. The change was a result of experience with theproject and improved ability to estimate the costs to completionand therefore the percentage complete. The completed-contractmethod will continue to be used for tax purposes. Income for 2018has been recorded using the percentage-of-completion method. Thefollowing information is available:
Pre-Tax Income
Percentage-of-Completion
Completed-Contract
Prior to 2018
$195,000
$145,000
2018
75,000
30,000
Required:
1) Prepare the necessary journalentries at December 31, 2018 to record the above corrections andchanges as appropriate. The books are still open for 2018. As Pigand Whistle has not yet recorded its 2018 income tax expense andpayable amounts, tax effects for the current year may be ignored.Pig and Whistleâs income tax rate is 25%. Assume that Pig andWhistle applies the taxes payable method of accounting for incometaxes.
Pig and Whistle Company, a smallcompany following ASPE, is adjusting and correcting its books atthe end of 2017. In reviewing its records, it compiles thefollowing information.
a) Pig and Whistle has failed to accrue sales commissionspayable at the end of each of the last two years, as follows:
Dec. 31, 2017 | $6,200 |
Dec. 31, 2018 | $3,800 |
B) In reviewing the December 31, 2018 inventory, Pig and Whistlediscovered errors in its inventory-taking procedures that havecaused inventories for the last three years to be incorrect, asfollows:
Dec. 31, 2016 | Understated $21,000 |
Dec. 31, 2017 | Understated $24,000 |
Dec. 31, 2018 | Overstated $ 9,000 |
Pig and Whistle has already made anentry that recognized the incorrect December 31, 2018 inventoryamount.
C) In 2018, Pig and Whistle changed the depreciation method onits office equipment from double-declining-balance to straight-linebecause of a change in the pattern of benefits received. Theequipment had an original cost of $160,000 when purchased onJanuary 1, 2016. At that time, it was estimated that the officeequipment had an eightyear useful life and no residual value.Depreciation expense recorded prior to 2018 under thedouble-declining- balance method was $70,000. Pig and Whistle hasalready recorded 2018 depreciation expense of $22,500 using thedouble-declining-balance method.
D) Before 2018, Pig and Whistle accounted for its income fromlong-term construction contracts on the completed- contract basisbecause it was unable to reliably measure the degree of completionor the estimated costs to complete. Early in 2018, Pig and Whistlechanged to the percentage-of-completion basis for financialaccounting purposes. The change was a result of experience with theproject and improved ability to estimate the costs to completionand therefore the percentage complete. The completed-contractmethod will continue to be used for tax purposes. Income for 2018has been recorded using the percentage-of-completion method. Thefollowing information is available:
Pre-Tax Income | ||
Percentage-of-Completion | Completed-Contract | |
Prior to 2018 | $195,000 | $145,000 |
2018 | 75,000 | 30,000 |
Required:
1) Prepare the necessary journalentries at December 31, 2018 to record the above corrections andchanges as appropriate. The books are still open for 2018. As Pigand Whistle has not yet recorded its 2018 income tax expense andpayable amounts, tax effects for the current year may be ignored.Pig and Whistleâs income tax rate is 25%. Assume that Pig andWhistle applies the taxes payable method of accounting for incometaxes.
Related questions
Bonita Company is in the process of adjusting and correcting itsbooks at the end of 2017. In reviewing its records, the followinginformation is compiled.
| 1. | Bonita has failed to accrue sales commissions payable at theend of each of the last 2 years, as follows. |
| December 31, 2016 | $3,300 | |
| December 31, 2017 | $2,300 |
| 2. | In reviewing the December 31, 2017, inventory, Bonitadiscovered errors in its inventory-taking procedures that havecaused inventories for the last 3 years to be incorrect, asfollows. |
| December 31, 2015 | Understated | $16,700 | ||
| December 31, 2016 | Understated | $19,000 | ||
| December 31, 2017 | Overstated | $6,000 |
Bonita has already made an entry that established the incorrectDecember 31, 2017, inventory amount.
| 3. | At December 31, 2017, Bonita decided to change the depreciationmethod on its office equipment from double-declining-balance tostraight-line. The equipment had an original cost of $90,000 whenpurchased on January 1, 2015. It has a 10-year useful life and nosalvage value. Depreciation expense recorded prior to 2017 underthe double-declining-balance method was $39,600. Bonita has alreadyrecorded 2017 depreciation expense of $11,600 using thedouble-declining-balance method. | |
| 4. | Before 2017, Bonita accounted for its income from long-termconstruction contracts on the completed-contract basis. Early in2017, Bonita changed to the percentage-of-completion basis foraccounting purposes. It continues to use the completed-contractmethod for tax purposes. Income for 2017 has been recorded usingthe percentage-of-completion method. The following information isavailable. |
Pretax Income | ||||
Percentage-of-Completion | Completed-Contract | |||
| Prior to 2017 | $141,700 | $94,900 | ||
| 2017 | 57,500 | 21,600 | ||
Prepare the journal entries necessary at December 31, 2017, torecord the above corrections and changes. The books are still openfor 2017. The income tax rate is 40%. Bonita has not yet recordedits 2017 income tax expense and payable amounts so current-year taxeffects may be ignored. Prior-year tax effects must be consideredin item 4. (Credit account titles are automaticallyindented when amount is entered. Do not indent manually. If noentry is required, select "No Entry" for the account titles andenter 0 for the amounts.)
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. | |||
Exercise 22-15
The first audit of the books of Buffalo 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 $534,000 (salvage value of $53,400) 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 $42,000 which was paid in 2018 and was debited to Salaries and Wages Expense. | |
| 3. | A tax lawsuit that involved the year 2016 was settled late in 2018. It was determined that the company owed an additional $90,000 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 $90,000 to a loss account in 2018. | |
| 4. | Buffalo Company purchased a copyright from another company early in 2016 for $54,000. Buffalo 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 $81,000 of inventory considered to be obsolete; this loss was charged directly to Retained Earnings. |
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.
