Accounting journal entries, corrections, prior period
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Patricia Voga Company is in the process of adjusting and correcting its books at the end of 2008. In reviewing its records, the following information is complied.
1. Voga has failed to accrue sales commissions payable at the end of each of the last 2 years, as follows.
December 31, 2007 $4,000
December 31, 2008 $2,500
2. In reviewing the December 31, 2008, inventory, Voga discovered errors in its inventory-taking procedures that have caused inventories for the last 3 years to be incorrect, as follows.
December 31, 2006 Understated $16,000
December 31, 2007 Understated $21,000
December 31, 2008 Overstated $ 6,700
Voga has already made an entry that established the incorrect December 31, 2008, inventory amount.
3. At December 31, 2008, Voga decided to change the depreciation method on its office equipment from double-declining balance to straight-line. The equipment has an original cost of $100,000 when purchased on January 1, 2006. It has a 10-year useful life and no salvage value. Depreciation expense recorded prior to 2008 under the double-declining balance method was $36,000. Voga has already recorded 2008 depreciation expense of $12,800 using the double-declining balance method.
4. Before 2008, Voga accounted for its income from long-term construction contracts on the completed-contract basis. Early in 2008, Voga changed to the percentage-of-completion basis for accounting purposes. It continues to use the completed-contract method for tax purposes. Income for 2008 has been recorded using the percentage-of-completion method. The following information is available.
Pretax Income
Percentage-of-completion Completed-Contract
Prior to 2008 $150,000 $95,000
2008 60,000 20,000
Instructions:
Prepared the journal entries necessary at December 31, 2008, to record the above corrections and changes. The books are still open for 2008. The income tax rate is 40%. Voga has not yet recorded its 2008 income tax expense and payable amounts so current-year tax effects may be ignored. Prior-year tax effects must be considered in item 4.
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Solution Summary
Solutions with explanation are provided to carefully explain the rationale for the answers. the narrative tells you what the journal entry must be and why, and the entries are given following the explanations.
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1. Record the total liability to sales commissions payable, but split the debit part of the entry to current year and prior year. You don't want 2007 expense in the 2008 accounting. That portion is a prior period adjustment in the equity section of the balance sheet.
Debit Prior period adjustment $4,000
Debit Sales commissions expense $2,500
Credit Sales commissions payable $6,500
2. This is a poorly worded question which I can read two ways. Should we be dealing with the total of the 3 adjustments, or only the current year? I assume they would like you to deal with the total to test ...
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