ACFI-492/592 Advanced Financial Reporting

Walsh

Project #2

You have been assigned to examine the financial statements of Bridgewater, Inc. for the year ended December 31, 2018. You discover the following situations in February 2019.

Bridgewater, Inc. has not accrued salaries payable at the end of each of the last 2 years, as follows.

December 2016$6,000

December 2017$0

December 2018$4,100

The physical inventory count has been incorrectly counted resulting in the following errors.

December 2016Understated$12,000

December 2017Understated$14,000

December 2018No error$0

The company received $24,000 from a customer on a special order on December 22, 2018. It was recorded as a sale on the day the money was received. The merchandise arrived at Bridgewater, Inc.s of business on January 16, 2019 and shipped it to the customer on January 17, 2019. The inventory was not included in the ending inventory on December 31, 2018.

In 2018, the company sold equipment for $3,100 which originally cost $30,000 and had a book value of $4,000. The company recorded the following on the date of sale:

Cash 3,100

Equipment3,100

At December 31, 2018 Bridgewater, Inc. decided to change the depreciation method on its machinery from double-declining-balance to straight-line. The Machinery had an original cost of $150,000 when purchased on January 1, 2016. It has a 10-year useful life and no salvage value. Depreciation expense has been recorded each year including 2018using the double-declining method.

In 2017 a competitor company filed a patent-infringement suit against Bridgewater, Inc. claiming damages of $150,000. During December 2018 the companys legal counsel indicated that an unfavorable verdict is probable and estimated to be a loss of $135,000. The company has not reflected or disclosed this situation in the financial statements.

A $24,000 insurance premium paid on July 1, 2017 for a policy that expires on June 30, 2019, was charged to Prepaid Insurance. The trial balance at 12/31/18 shows the $24,000 in the Prepaid Insurance account.

A trademark was acquired at the beginning of 2016 for $40,000. The trademark was expensed when purchased. The trademark should be amortization over 10 years.

Commissions on sales have been entered when paid. Commissions payable on December 31 of each year were as follows.

2016 $1,400

2017 800

2018 1,120

A relatively small number of machines have been shipped on consignment. These transactions have been recorded as ordinary sales and billed as such. On December 31 of each year, machines billed and in the hands of consignees amounted to:

2016 none

2017 none

2018 4,800

The inventory was properly included in the inventory on the Balance Sheet at December 31.

11.Reported Net Income is:

2016 $815,000

2017 $760,000

2018 $890,000

The inventory was properly included in the inventory on the Balance Sheet at December 31.

Instructions

Assume the trial balance has been prepared but the books HAVE NOTbeen closed for 2018. Assuming all amounts are material, prepare journal entries showing the adjustments that are required. (Ignore income tax considerations).

Assume the trial balance has been prepared but the books HAVE been closed for 2018. Assuming all amounts are material, prepare journal entries showing the adjustments that are required. (Ignore income tax considerations).

(c) Complete the attached schedule correcting net incomes for 2016, 2017 and 2018.