Case 3

On April 1, 2020, you were hired by ABC Inc., a closely held company, as a staff member of its newly created internal auditing department. While reviewing the companys records for 2018 and 2019, you discover that no adjustments have yet been made for the items listed below:

1. Interest income of $20,000 was not accrued at the end of 2018. It was recorded when received in January 2019.

2. A computer costing $10,000 was expensed when purchased on July 1, 2018. It is expected to have a 4-year life with no residual value. The company typically uses straight-line depreciation for all fixed assets.

3. Research costs of $45,000 were incurred early in 2018. They were capitalized and were to be amortized over a 3-year period. Amortization was recorded for 2018 and 2019.

4. On January 2, 2018, ABC leased a building for 5 years at a monthly rental of $11,000. On that date, the company paid the following amounts, which were expensed when paid.

Security deposit $35,000

First months rent $11,000

Last months rent $11,000

Total $57,000

5. The company received $60,000 from a customer at the beginning of 2018 for services that it is to perform evenly over a 3-year period beginning in 2018. None of the amount received was reported as unearned revenue at the end of 2018.

6. Merchandise inventory costing $24,000 was in the warehouse at December 31, 2018, but was incorrectly omitted from the physical count at that date. The company uses the periodic inventory method.

Required: Explain the problems for each items and prepare journal entries showing the adjustments that are required!