Question

In October 2019, Green Apple Food Corp hired Susan Lau as their new CFO. Susan then launched a thorough review of corporation’s past accounting, particularly of transactions that exceeded the company’s normal level of materiality. As a result of her review, she instructed the company’s accountant to correct two errors:

a. The company made extensive improvements to the granola bar production process in 2016, and installed a substantial amount of new equipment. The entire cost of the equipment was accidentally charged to income as restructuring expense in 2016. However, the equipment should have been capitalized and added to the factory equipment account. The cost of the equipment was $1,500,000. Green Apple depreciates its factory equipment on the straight-line basis over twelve years. A full year’s depreciation is charged in the year that equipment is acquired.

b. A year-end cut-off error occurred in 2017. A large shipment of nonperishable supplies arrived from South America on the last day of 2017 and had been left in the shipping containers outside the main plant. As a result, the supplies were recorded as received in 2018 and had not been included in the year-end 2017 inventory count. The account payable also had not been recorded in 2017. The supplies cost $140,000.

The company’s tax rate is 30%

Required:

1. Prepare the necessary journal entry for part a, if any, to correct the accounts as of January 1, 2019.

2. Prepare the necessary journal entry for part b, if any, to correct the accounts as of January 1, 2019.

3. Prepare the journal entry for part b if the error was discovered at the end of 2018.

4. Prepare the retained earnings section of the SCE for the year ended December 31, 2019, assuming that retained earnings on January 1, 2019, was $2,300,000; net income for before tax for 2019 was $610,000, and dividends of $270,000 were declared and paid during 2019.

Answer 1

Point No. 1
Jan 1, 2019	Factory Equipment	Dr	$15,00,000
	To Income Statement (Misc)	Cr		$15,00,000
	(Capitalization wrongly booked
	in Income Now Corrected )
	To Income Statement (Misc)	Dr	$2,50,000
	To Provision for Depreciation	Cr		$2,50,000
	(Depreciation already charged
	Correctly in Year 2016, Hence
	Depreciation provided For 2
	Years i.e., 2017 & 2018 on SLM
	Dep=(1500000/12)*12=2,50,000)
Jan 1 , 2019
Point No. 2	No Journal entry is required as the same has been
	recorded in 2018. Since the purchase was not recorded
	in 2017 it is also not the part of Inventory for that year.
	And as we do not know that what is the margin on this
	Hence tax also can not be calculated.
Point No. 3
2018	Purchases Account	Dr.	$1,40,000
	To Accounts payable	Cr		$1,40,000
	(Entry to record purchses
	That was omited during 2017
	Recorded in Year 2018)
Point-4
2019	Net Income before Tax			$6,10,000
	Add Income by rectifying Factory Equipment		$15,00,000
	Less Depreciation for year 2017 & 2018 Rectification		$2,50,000	$12,50,000
	Net Income before tax			$18,60,000
	Less Tax 30 %			$5,58,000
	Income after tax			$13,02,000
2019	Appropriation Account
	Retained earning B/f			$23,00,000
	Income after tax for 2019			$13,02,000
			Total	$36,02,000
	Less Dividend			$2,70,000
31 Dec,2019	Retained earning			$33,32,000