Question
In: Accounting
The first audit of the books of Fenimore Company was made for the year ended December...
The first audit of the books of Fenimore Company was made for the year ended December 31, 2018. In examining the books, the auditor found that certain items that resulted from changes in accounting policies, accounting estimates and errors had been overlooked or incorrectly handled in the last 3 years.
Instructions
1. Describe the types of accounting changes.
2. Explain the accounting procedures for changes in accounting policies and estimates and the correction of errors.
3. Assuming that the books for 2018 have not been closed, prepare the correcting journal entries related to the following items. Disregard the effects of these corrections on income tax.
a) At the beginning of 2016, the company purchased a machine for $510,000 (residual value of $51,000) that had a useful life of 5 years. The bookkeeper used straight-line depreciation but failed to deduct the residual value in computing the depreciation base for the years 2016, 2017, 2018.
b) At the end of 2017, the company failed to accrue sales salaries of $45,000.
c) A tax lawsuit that involved the year 2013 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 debited the $85,000 to a loss account in 2015 and credited Cash for the same amount. (1 mark)
d) Fenimore Company purchased a copyright from another company early in 2016 for $50,000. Fenimore had not amortized the copyright because its value had not diminished. The copyright has a useful life at purchase of 20 years.
e) In 2018, the company wrote off $87,000 of inventory considered to be obsolete; this loss was charged directly to Retained Earnings and credited to Inventory.
f) Year-end salaries and wages payable of $3,400 were not recorded because the bookkeeper thought that “they were immaterial.”
g) Insurance for a 12-month period purchased on November 1 of this year was charged to insurance expense in the amount of $3,300 because “the amount of the cheque is about the same every year.”
h) Reported sales revenue for the year is $1,908,000. This includes all sales taxes collected for the year. The sales tax rate is 6%. Because the sales tax is forwarded to the Department of Revenue, the Sales Tax Expense account is debited. The bookkeeper thought that “the sales tax is a selling expense.” At the end of the current year, the balance in the Sales Tax Expense account is $103,400.
Solutions
Expert Solution
| 1. Describe the types of accounting changes. | ||||||||
| Accounting changes are of three types: | ||||||||
| a. Change in Accounting Principles: It comes when company adopts new generally accepted accounting principle as compared to last year generally accepted accounting principle. For example: Company changes its depreciation method from WDV to Straight Line Method. | ||||||||
| b. Change in Estimates: It arises due to restatement of accounting assumptions. For example- A company estimates life of a machine to be five years with salvage value of $5000 and charges depreciation accordingly but in next year it estimates its life to be seven years with salvage value of $3000, depreciation amount get changed accordingly. | ||||||||
| c. Change in Reporting entity: It comes when two or more previously separate companies are combined together and reported as one entity. The companies have to restate their prior period's financial statements as if they were one entity in the near past. | ||||||||
| 2. Accounting procedures for changes in accounting policies and estimates and the correction of errors. | ||||||||
| If any change is made in Accounting Policies and estimates, monetary effect of the same must be seperately disclosed in Financial statements and company will restate its statement for all prior periods, as if new principle had always been in place, unless it is impracticle to do so. It will disclose the effect of change in accounting policies in its Financial statements. | ||||||||
| 3. Correction of errors | ||||||||
| a. | ||||||||
| Depreciation as charges by company=510000/5=102000 | ||||||||
| Correct Depreciation should be charged by company=(510000-51000)/5=91800 | ||||||||
| Year | Actually charged | Correct Depreciation | Extra depreciation charged | Correcting ledger | ||||
| 2016 | 102000 | 91800 | 10200 | Retained earning | ||||
| 2017 | 102000 | 91800 | 10200 | Retained earning | ||||
| 2018 | 102000 | 91800 | 10200 | Depreciation Account | ||||
| 30600 | ||||||||
| Accounting entry: | ||||||||
| Machine A/C | Dr | 30600 | ||||||
| Retained earnings | Cr | 20400 | ||||||
| Depreciation Account | Cr | 10200 | ||||||
| b. Retained earnings | Dr | 45000 | ||||||
| Bank | Cr | 45000 | ||||||
| c. No adjustment is required | ||||||||
| d. Amortisation amount per year=50000/20 | ||||||||
| 2500 | ||||||||
| Year | Actually charged | Correct Depreciation | Less amortised | Correcting ledger | ||||
| 2016 | 0 | 2500 | 2500 | Retained earning | ||||
| 2017 | 0 | 2500 | 2500 | Retained earning | ||||
| 2018 | 0 | 2500 | 2500 | Amortisation Account | ||||
| 7500 | ||||||||
| Retained earning | Dr | 5000 | ||||||
| Amortisation Account | Dr | 2500 | ||||||
| Copyright A/c | Cr | 7500 | ||||||
| e. Loss on Inventory A/c | Dr | 87000 | ||||||
| Retained earning | Cr | 87000 | ||||||
| f. Salary Expenses | Dr | 3400 | ||||||
| Salaries and Wages Payable A/c | Cr | 3400 | ||||||
| g. Prepaid Expense A/c | Dr | 3300/12*10=2750 | ||||||
| Insurance Expense A/c | Cr | 2750 | ||||||
| h. Sales A/c | Dr | 103400 | ||||||
| Sales Tax Expense A/c | Cr | 103400 | ||||||
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