Question

In: Accounting

You have been assigned to examine the financial statements of Jones, Inc. for the year ended...

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)

Solutions

Expert Solution

Solution for above problem

Adjustment journal entries

  1. Accrued salaries payable entry to be done in Dec, 18

Salary A/c ……………………………………………… Dr10,100

To Salary Payable10,100

(6000 + 4100 is accounted for)

  1. Physical inventory count error to be corrected

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)

  1. Rectification for special order of 24,000

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

  1. Rectification entry for sale of equipment. Loss on sale to be booked.

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

  1. Rectification entry for Depreciation

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

  1. In this legal case company has to record the estimated liability as contingent liability in the books of accounts.

There is no need to provide for liability but can be shown as contingent liability of 135,000 in books.

  1. Insurance premium expense upto Dec-18 to be recognized in books as expenses. Not to be shown as prepaid.

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

  1. Trade mark to be amortized hence profit will increase as one time expense will be amortized over a period of 10 years.

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

  1. Commission on sales to be booked on accrued basis on year to year.

Profit & loss A/c………………………………………………………….Dr3320

To Commission payable3320

  1. Machine shall be booked as consignment sale & not ordinary sale

Consignment A/c……………………………………………………….Dr4800

To goods sent on consignment basis4800

Rectification for ordinary sale entry will be

Profit & Loss A/c…………………………………………………………..Dr4800

To Sales4800


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