Purchase Solution

Errors: inventory, notes, depreciation, bonds, leases

Not what you're looking for?

Ask Custom Question

AC Co. began Operations in 2001 and have never been audited. You have been hired to audit their 12/31/04 financial statements. The books are kept on a cash basis. In the past the bookkeeper has prepared the tax return on the same basis as the books, thus no temporary differences were recognized. You are, therefore, assuming that the same errors were made on the tax return and will be corrected by amended returns, except the temporary differences created by the Warranty expense, unreal gain/loss on trading securities, and the real gain/loss on available for sale securities. The tax rate is 30% for all 4 yrs and it is more likely than not that AC Co. will be profitable in the future.

Prepare correcting entries for the following, rounding to the nearest dollar:

1) Ending inventory was misstated at the end of each year as follows:

2001- 30,000 overstated
2002- 25,000 overstated
2003- 27,000 overstated
2004- 23,123 understated

2) On 7/1/2003 the company accepted a $24,232 non-interest bearing note from a customer in settlement of an overdue accounts receivable. The note requires 4 equal payments of $6,058 every 6 months beginning on 12/31/03. The annual market rate of interest is 10% (use effective intereste rate method). The bookkeeper made the following entries:

7/1/03 Notes Receivable 24,232
Accounts Receivable PV of PMTs ($21,481)
Gain on Note Receivable Difference ( $2,751)

12/31/03 Cash 6,058
Note Receivable 6058
6/30/04 & 12/31/04- Same as above

3) You discover that delivery equipment costing $39,900 on 01/01/01 has been depreciated (including 04)as if it were display equipment (display equipment is depreciated using 5 yr. life, no salvage value, straight-line depreciation). Delivery equipment is depreciated using 5 yr, 20% salvage value, SYD method. You decide to account for this as a change in accounting estimate, not as an error.

4) The 10 yr, 10%, $399,000 face value bonds were issued on 01/01/02. The proceeds of $400,000 were used to acquire the current store building. The interest payments (on 6/30 and 12/31 each yr.) have been debited to Interest Expense-Bonds. Since the difference between straight-line and effective-interest amortization of the premium will be immaterial you decide to use straight-line amortization. Each $1000 bond is convertible into 75 Shares of AC Co. Stock.

5) On 01/01/03 the company leased some display equipment from XYZ leasing for 5 yrs. The lease calls for 5 equal payments of $14,232 at 01/01/03, 01/01/04, 05, 06, & 07. The first and second payments were debited to lease expense. Since the lease is for 100% of the estimated life, you decide the lease should be capitalized and depreciated in accordance to normal policy for display equipment (display equipment is depreciated using 5 yr. life, no salvage value, straight-line depreciation). An appropriate interest rate is 10% for a lease of this type.

Purchase this Solution
Solution Summary

The solution presents an explanation of each item followed by a summary of entries to be made.

Solution Preview

1. For purposes of the audit, you will only correct 2004. Any errors or adjustments that effect any of the prior years will be lumped into prior period adjustments as one amount. Amended tax returns by year are another story, but we are only concerned with 2004. Note there would not be comparable statements to the prior year because it was not audited or reviewed by an outside CPA. Since ending inventory is a cumulative account, we only have to deal with the 2004 misstatement. You would debit inventory for 23,123 and credit cost of goods sold.

2. This problem states that the company has agreed to collect the full amount of the account receivable, but it will take 2 years to recover the funds. Considering the time value of money, the company will not really collect the full amount. Using an amortization program to calculate the present value of the note, I agree with her amounts. Adjust the original entry to reduce the amount of the note receivable and get rid of the gain she reported. The credit side of that correcting entry is a prior period adjustment. Don't forget the offsetting tax entry of $825 ($2751 x 30%). There are no entries to be made for the discount because it is unstated.

The amount of uncollectible receivable should ...

Purchase this Solution
Free BrainMass Quizzes
SWOT

This quiz will test your understanding of the SWOT analysis, including terms, concepts, uses, advantages, and process.

Organizational Behavior (OB)

The organizational behavior (OB) quiz will help you better understand organizational behavior through the lens of managers including workforce diversity.

Team Development Strategies

This quiz will assess your knowledge of team-building processes, learning styles, and leadership methods. Team development is essential to creating and maintaining high performing teams.

IPOs

This Quiz is compiled of questions that pertain to IPOs (Initial Public Offerings)

Paradigms and Frameworks of Management Research

This quiz evaluates your understanding of the paradigm-based and epistimological frameworks of research. It is intended for advanced students.

View More Free Quizzes
Related BrainMass Solutions

  • Johnson Corp, Felner Industries, Terry Transport, Tax, Bond

    Smith's 2011 tax depreciation exceeded its book depreciation by $25,000. Smith also had nondeductible book expenses of $10,000 related to permanent differences. Smith's tax rate for 2011 was 40%, and the enacted rate for years after 2011 is 35%.

  • Business for Huffman Company Leases

    253836 Business for Huffman Company Leases 1.Huffman Company leases a machine from Lincoln Corp. under an agreement which meets the criteria to be a capital lease for Huffman.

  • Jamona Corporation Exercise

    Prepare journal entries that relate to the balance sheet items above with appropriate backup lead schedules for investments, inventory, fixed assets, and capital leases. Prepare appropriate note disclosures.

  • Calculate cash from investments

    Accrued Expenses $30,000 Notes Payable $30,000 Bonds Payable $50,000 Common Stock $600,000 Net Income $55,000 Dividends Paid $7,000 Evergreen Inc.

  • Costco Wholesale Corporation Annual Report 2010: Analyze

    Statutory Tax Rate: % Notes to the Financial Statements - Question 8 Review your Costco's lease note (and related balance sheet information), then identify the following amounts: Minimum lease payments under operating leases Minimum lease payments

  • Side Kicks Company: Balance Sheet Adjustment and Preparation

    85,000 Construction Work in Progress 124,000 Patents 36,000 Equipment 400,000 Accumulated Depreciation of Equipment 140,000 Unamortized Discount on Bonds Payable 20,000 Accounts Payable 148,000 Accrued Expenses 49,200 Notes Payable 94,000

  • Balance Sheet - Error Corrections

    "Reserve for" Depreciation should be "Accumulated" Depreciation. 9. Unamortized Discount on Bonds Payable should be classified with and deducted from Bonds Payable. 10.

  • Epic Corporation

    ASSETS LIABILITIES Cash $ 70,000 Accounts Payable $ 100,000 Accounts Receivable 150,000 Notes Payable 120,000 Inventory 280,000 Bonds Payable

  • Calculating overall change in cash

    Accounts Receivable ($5,000) Supplies $1,000 Inventory $3,000 Prepaid Rent ($2,000) Fixed Assets $18,000 Accumulated Depreciation $4,000 Accounts Payable $3,000 Accrued Expenses ($1,000)

  • Prepare a balance sheet in proper order for the ABC Corporation

    Accumulated depreciation $300,000 Retained earnings 96,000 Cash 10,000 Bonds payable 136,000 Accounts receivable 48,000 Plant and equipment-original cost 680,000 Accounts payable 35,000 Allowance for bad debts 6,000 Common stock $1 par

View More Related Solutions