In: Accounting
You have been assigned to examine the financial statements of Jones, Inc. for the year ended December 31, 2018. You discover the following situations in February 2019.
Jones, Inc. has not accrued salaries payable at the end of each of the last 2 years, as follows.
December 2016 6000
December 2017 0
December 2018 4,100
2. The physical inventory count has been incorrectly counted resulting in the following errors.
December 2016 Understated $12,000
December 2017 Understated $14,000
December 2018 No Error $0
3. The company received 24,000 from a customer on a special order on December 22, 2018. It was recorded as a sale on the ay the money was received. The merchandise arrived at Jones, Inc.’s of business on January 16, 2019 and shipped it to the customer on January 17, 2019. The inventory was not included in the ending inventory on December 31, 2018.
4. In 2018, the company sold equipment for $3,100 which originally cost $30,000 and had a book value of $4,000. the company recorded the following on the date of sale:
Cash 3,100
Equipment 3,100
5. At December 31, 2018 Jones Inc decided to change the depreciation method on its machinery from double declining balance to straight line. The machinery had an original cost $150,000 when purchased on January 1, 2016. It has 10 year useful life and no salvage value. Depreciation expense has been recorded each year including 2018 using double declining method.
6. In 2017 a competitor company filed a patent-patent-infringement suit against Jones, claiming damages of $150,000. During December 2018 the company’s legal counsel indicated that an unfavorable verdict is probably and estimated to be a loss of $135,000. The company has not reflected or disclosed this situation in the financial statements.
7. A $24,000 insurance premium paid of July 1, 2017 for a policy that expires on June 30, 2019, was charged to Prepaid Insurance. The trial balance at 12/31/18 shows the $24,000 in the Prepaid Insurance account.
8. A trademark was acquired at the beginning of 2016 for $40,000. The trademark was expensed when purchased. The trademark should be amortized over 10 years.
9. Commisions on sales have been entered when paid. Commissions payable on December 31 of each year were:
2016 1,400
2017 800
2018 1,120
10. A relatively small number of machines have been shipped on consigment. These transactions have been recorded as ordinary sales and billed as such. On December 31 of each year, machines billed and in the hands of consignees amounted to:
2016 none
2017 none
2018 4,800
11. Reported Net Income is
2016 815,000
2017 760,000
2018 890,000
The inventory was properly included in the inventory on the Balance Sheet at December 31
Instructions
Assume the trial balance has been prepared but the books HAVE NOT been closed for 2018. Prepare journal entries showing adjustments that are required. (Ignore income tax)
Assume the trial balance has been prepared but the books HAVE been closed for 2018. Prepare journal entries showing the adjustments that are required. (Ignore income tax)
Solution for above problem
Adjustment journal entries
Salary A/c ……………………………………………… Dr10,100
To Salary Payable10,100
(6000 + 4100 is accounted for)
Inventory A/c……………………………………………Dr2,000
To Profit & Loss A/c2,000
(14,000 – 12,000 is accounted for…….14,000+12,000 to be added to closing stock & 14,000 to be added to opening stock hence net impact to be given on profits)
The sale to be recorded as & when the goods with risk is transferred to the buyer. Hence payment received shall be treated as advance in books. Also it should have been added in inventory as the goods are transferred on 17th January 2019.
Rectification entry will be
Sale of goods A/c…………………………………………..Dr 24,000
To Advance against sale A/c 24,000
Cash A/c………………………………………………………..Dr3100
Loss on sale of Equipment A/c……………………….Dr900
To Equipment4000
Profit & loss A/c…………………………………………..Dr900
To Loss on sale of Equipment900
Calculation of depreciation
SLM method = 150,000 / 10 years = 15,000 per year
Hence for 3 years depreciation will be 15,000 x 3 = 45,000
WDV Method (It is assumed that depreciation rate is 15%)
150,000 x 15% = 22,500 for 2016
127,500 x 15% = 19,125 for 2017
108,375 x 15% = 16,256 for 2018
Hence total depreciation for 3 years will be 57,881
As per above calculation depreciation as per SLM is less than WDV hence rectification entries will be
Machinery A/c…………………………………………….Dr12,881 (57,881-45,000)
To Depreciation A/c12,881
Depreciation A/c…………………………………………..Dr12,881 (57,881-45,000)
To Profit & Loss A/c12,881
There is no need to provide for liability but can be shown as contingent liability of 135,000 in books.
Calculation of Premium expense amount
Premium 24,000 / 24 months = 1000 per month
Months from July 17 to Dec 18 are 18 months hence 18,000 to be recorded as expense & 6000 to be shown as prepaid expense.
Rectification entry will be
Profit & loss A/c………………………………………………Dr18,000
To Prepaid Insurance18,000
Amortization amount = 40,000 / 10 = 4000 per years hence for 3 years it will be 12000
Trade Mark A/c…………………………………………………………Dr40,000
To Profit & loss A/c 40,000
Profit & Loss A/c……………………………………………………….Dr 12,000
To Trade Mark 12,000
Profit & loss A/c………………………………………………………….Dr3320
To Commission payable3320
Consignment A/c……………………………………………………….Dr4800
To goods sent on consignment basis4800
Rectification for ordinary sale entry will be
Profit & Loss A/c…………………………………………………………..Dr4800
To Sales4800