Question

Manila Corp reported net incomes for a three-year period as follows:

2012	2011	2010
$240,000	$225,000	$180,000

During the 2012 year-end audit, the following items come to your attention:

1.   Manila bought a truck on January 1, 2009 for $98,000 cash, with an $8,000 estimated residual value and a six-year life. The company debited an expense account for the entire cost of the asset. Manila uses straight-line depreciation for all vehicles.

2.   During 2012, Manila changed from straight-line depreciation for its cement plant to double declining balance. The following calculations present depreciation on both bases:

		2012	2011	2010
Straight-line		$18,000	$18,000	$18,000
Double declining balance		23,100	30,000	36,000

The net income for 2012 was calculated using the double declining balance method.

3.   In reviewing its provision for uncollectible accounts during 2012, the corporation has determined that 1% is the appropriate amount of bad debt expense to be charged to operations. The company had used 1/2 of 1% as its rate in 2011 and 2010 when the expense had been $9,000 and $6,000, respectively. Manila recorded bad debt expense using the new rate for 2012. If they had used the old rate, they would have recorded $3,000 less bad debt expense on December 31, 2012.

Required

(a) Prepare the general journal entry required to correct the books for the item 1 situation (only) of this problem, assuming that the books have not been closed for 2012.

     

(b) Present comparative income statement data for the years 2010 to 2012 in accordance with generally accepted accounting principles starting with income before cumulative effect of any accounting changes. Ignore all income tax effects.

     

(c) Assume that the beginning retained earnings balance (unadjusted) for 2010 was $630,000. At what adjusted amount should the beginning retained earnings balance for 2010 be shown, assuming that comparative financial statements were prepared?

     

(d) Assume that the beginning retained earnings balance (unadjusted) for 2012 is $900,000 and that comparative financial statements are not prepared. At what adjusted amount should this beginning retained earnings balance be shown?

     

Answer 1

ANSWERS:-

(a) For wrongly recorded entries, reverse the entry all ready done in ledgers. That is to say,

Asset need to be debited and cash need to be credited, instead management done wrong entry

CORRECT JOURNAL ENTRY WILL BE:-

Asset A/c (Truck A/c) Dr 98000

To Profit and loss a/c 98000

(journal entry reversed)

Asset A/c ( Truck A/c ) Dr. 98000

To. Cash A/c 98000

(Asset being purchased in cash )

(b) Adjustments correctly recorded.

PARTICULARS	2010	2011	2012
Net Income	180000	225000	240000
add
depreciation wrongly debited	18000	12000	5100
less:-
Bad debt less recorded			-3000
TOTAL INCOME AFTER ADJUSTMENT	198000	237000	242100

ANSWER (c)

IF RETAINED EARNINGS FOR 2010 IS 630000 THEN DEPRECIATION WRONGLY RECORDED FOR THE YEAR WILL BE ADDED TO INCOME WHICH GIVES ADJUSTED REATINED EARNINGS FOR 2010 AS 630000+18000= 648000

ANSWER (d)

IF RETAINED EARNINGS FOR 2012 IS 900000 THEN, IF ADJUSTMENTS OF PREVIOUS YEARS ARE ADJUSTED THEN REATAINED EARNINGS ARE GIVEN BELOW:-

900000+ 18000+12000+2100= 932100 (NOTE:- REFER TABLE FOR DESCRIBTION OF ADJUSTMENTS)

18000- ADJUSTED FOR THE YEAR 2010

12000- ADJUSTED FOR THE YEAR 2011

2100- ADJUSTED FOR THE YEAR 2012

IF COMPARATIVE FINANCIAL STATEMENT IS NOT PREPARED THEN,

IF ADJUSTMENTS ARE NOT DONE OF PREVIOUS YEARS THEN ONLY RETAINED EARNINGS OF 2012 WILL BE CHANGED:- 900000+ (5100-3000) = 902100

NOTE:- PLEASE REFER ABOVE TABLE FOR ADJUSTED FIGURES.