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Accounting errors and corrections

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ABC Corporation is a wholesale distributor of electronic components. Financial statements for the year ended December 31,2002, reported the following amounts and subtotals (in millions):

2001: Assets $740; Liabilities $330; Stockholders' Equity $410; Net Income $210; Expenses $150 2002: Assets $820; Liabilities $400; Stockholders' Equity $420; Net Income $230; Expenses $175

In 2003 the following situations occurred or came to light:

a. Internal auditors discovered that ending inventories reported on the financial statements the two previous years were misstated due to faulty internal controls. The errors were in the following amounts: 2001 inventory was overstated by $12 million and 2002 inventory was understated by $10 million.

b. A liability was accrued in 2001 for a probable payment of $7 million in connection with a lawsuit which was ultimately settled in December 2003 for $4 million.

c. A patent costing $18 million at the beginning of 2001 , expected to benefit operations for a total of six years, has not been amortized since acquired.

d. ABC's conveyer equipment has been depreciated by the sum-of-the-years'-digits basis since constructed a the beginning of 2001 at a cost of $30 million. It has an expected useful life of five-years and no expected residual value. At the beginning of 2003, ABC decided to switch to the straight-line method.

1. Prepare any journal entry necessary as a direct result of the change or error correction as well as any adjusting entry for 2003 related to the situation described (ignore income taxes).

2. Determine the amounts to be reported for each of the five items shown above (from the 2001 and 2002 financial statements) when those amounts are reported again in the comparative financial statements for 2003 through 2001.

I don't think the payment was due or made in2001, they were just accuring it to show that this would be due in the future.

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