Question

Pretend you are an auditor (I know, I know, this is an amazing dream). Imagine that you are performing the 12/31/18 financial statement audit of Curly's Coffee and Vinyl Shop. During the substantive procedures, you discovered the situations listed below. If it is a 2018 error, then you will need to communicate these to the client and request that they be fixed within the 2018 financial records. In that case, write the adjusting journal entry that the client should book to correct. Include date, accounts debited and credited and amounts.

If no adjusting entry is needed, then write: “no adjusting entry necessary” and provide a brief explanation.

1. You tested their repairs and maintenance expense account and found an error. They purchased a fancy new espresso machine on 01/01/2018 (check #74 for $4,000). They mistakenly expensed it (as repairs and maintenance expense) instead of capitalizing. Write the journal entries needed to correct error and properly reflect all 2018 accounting entries that should have been booked related this capitalized asset, which has an expected 5-year useful life and no estimated salvage value.

Answer 1

The adjustment entry will be required in the Curly's Coffee and Vinyl Shop as they have mistakenly expense off the asset in Profit and Loss account.

Advise: It is advisable that in such type of questions, we should first write down the entry already passed and then see what entry should be passed. Once above two things are done then it will be very easy to provide correct/adjustment entry.

Below are the entries details:

Note: Please note in some cases Management may decide to write off the asset having small monetary value but as nothing was mentioned so it is assumed that it should be capitalized and expense off as repair and maintenance was not right.