The first audit of the books of Carla Company was made for the year ended December...

The first audit of the books of Carla Company was made for the year ended December 31, 2021. In examining the books, the auditor found that certain items had been overlooked or incorrectly handled in the last 3 years. These items are

1. At the beginning of 2019, the company purchased a machine for $561,000 (salvage value of $56,100) that had a useful life of 6 years. The bookkeeper used straight-line depreciation but failed to deduct the salvage value in computing the depreciation base for the 3 years.

2. At the end of 2020, the company failed to accrue sales salaries of $47,000.

3. A tax lawsuit that involved the year 2019 was settled late in 2021. It was determined that the company owed an additional $89,000 in taxes related to 2019. The company did not record a liability in 2019 or 2020 because the possibility of loss was considered remote, and charged the $89,000 to a loss account in 2021.

4. Carla Company purchased the copyright from another company early in 2019 for $54,000. Carla had not amortized the copyright because its value had not diminished. The copyright has a useful life at the purchase of 20 years.

5. In 2021, the company wrote off $87,000 of inventory considered to be obsolete; this loss was charged directly to Retained Earnings. Prepare the journal entries necessary in 2021 to correct the books, assuming that the books have not been closed. Disregard the effects of corrections on income tax.

Expert Solution

Your Answer is as follows:

No	Account Titles and Explanation	Debit	Credit
1	Accumulated Depreciation	$ 28,050
	Depreciation Expense		$ 9,350
	Retained Earnings		$ 18,700

2	Retained Earnings	$ 47,000
	Salaries and Wage Expense		$ 47,000

3	No Journal Required

4	Amortization Expense (54000/20)	$ 2,700
	Retained Earnings (54000/20*2)	$ 5,400
	Copyrights		$ 8,100

5	Inventory Write-off	$ 87,000
	Retained Earnings		$ 87,000

Workings
Incorrect Depreciation for 3 years(561000*3/6)	$ 280,500
Correct Depreciation for 3 years(561000-56100)*3/6	$ 252,450
Difference	$ 28,050
Current Year Depreciation - 2021	$ 9,350

ekkarill92 answered 1 year ago

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