Question

An audit of the books of Grinch company was conducted for the year ending December 31, 2018. In examining the books, the auditor found that certain items had been overlooked or incorrectly recorded. These items are:

1. The company purchased a copyright in early 2016 for $60,000. The bookkeeper has not amortized the copyright. The useful life at purchase was 10 years.

2. During 2018, the company sold fully depreciated equipment that originally cost $25,000 (no salvage value). The company incorrectly recorded the sale as follows:

Cash                                        3,500

                                    Equipment                               3,500

3. A $12,000 insurance premium paid on January 1, 2017, for a policy that expires on December 31, 2019, was charged to insurance expense.

4. The company failed to accrue sales commissions payable of $3,000 at the end of 2017. It was therefore expensed at the beginning of 2018.

5. Also, at December 31, 2018, Grinch decided to change the depreciation method on its office equipment from double-declining balance to straight line. The equipment had an original cost of $40,000 when purchased on January 1, 201 It has a 10-year useful life and no salvage value. Depreciation expense recorded prior to 2018 under the double-declining balance method was $19,520. Grinch has already recorded 2018 depreciation expense of $4,096 using the double-declining balance method.

Instructions:

Prepare the journal entries necessary in 2018 to correct the books, assuming the books have not been closed. Ignore all tax effects.

Answer 1

Depreciation p.a. of copyright = 60000/10 = $6,000 p.a.

Amortization expenses A/c Dr 6000

Retained earnings 12000

To Copyright 18000

(Being amortisation expense for current year and previous two years recorded to reatined earnings)

Equipment A/c Dr 3500

To gain on sale of asset A/c 3500

(Being correction entry passed for fully depreciated equipment sold)

Insurance A/c Dr 4000

Prepaid insurance A/c dr 4000

To Retained Earnings 8000

(Being prepaid insurance expenses wrongly recorded in 2017)

Retained earnings A/c Dr 3000

To Sales commision 3000

(Being sales commission of 2017 expensed in 2018 reversed to retained earnings)

Original cost of office equipment 40000

useful life = 10 years

Depreciation prior to 2018 = $ 19520

Depreciation for 2018 recorded = $4096

Depreciation rate = 10%

Depreciation under straight line method p.a = $4000

Depreciation from 2015 till 2017 = 4000 * 3 = 12000

Actual depreciation provided = 19520

Retained earnings adjustment (19520-12000 = 7520)

Current year adjustment = 4096 - 4000 = 96

Accummulated Depreciation A/c Dr 7616

To Depreciation 96

To Retained earnings 7520   

(Being current year excess depreciation provided reversed to depreciation and previous years reversed to retained earnings)

Note: all prior year adjustmets will be done to the retained earnings account.