Question 1.Using the following information, prepare a schedule showing the corrected income-before-taxes for 2021 and 2022:

a. Before any corrections, income before taxes for 2021 is $500,000 and for 2022 is $650,000

b. Depreciation for 2021 was erroneously recorded at $7,000 rather than $70,000. The bookkeeper realized the mistake in 2022, and added the 2021 amount to the depreciation applicable to 2022 of $80,000 bringing the 2022 total depreciation expense recorded to $143,000.

c. An inventory of office supplies was not made in 2021 or 2022. The controller estimates that 2021 Supplies Expense should have been $20,000 and 2022 Supplies Expense should have been $25,000.

d. During the audit, it came to light that the VP of Finance had made several very speculative investments that were not authorized. To hide his unauthorized activity, he instructed the bookkeeper to record the investment income each year as sales revenue. The amounts were $50,000 in 2021 and $32,000 in 2022. The Board of Directors fired the VP of Finance.

e. The VP of Finance sued the company for wrongful dismissal, asking for damages of $500,000. The attorneys for the company feel the suit is frivolous and the possibility of loss is remote.

f. During the 2021 physical inventory, $40,000 of inventory was overlooked and excluded from the 2021 ending inventory amount. The 2022 inventory procedures were improved, and the 2022 ending inventory is correctly stated.

g. The company leased additional warehouse space on January 1, 2021. They made the following payments, all debited to Rent Expense on January 1, 2021: rent for January March 2021 prepaid in the amount of $33,000; a security deposit of $5,000. The security deposit will be refunded on January 1, 2022. During 2021, the security deposit earns interest at 6%. Both the 2021 interest and the deposit itself were received from the landlord on January 1, 2022.

h. On January 1, 2021, the company purchased a two-year insurance policy for $10,000 covering 2021 and 2022. At December 31, 2022, the Prepaid Insurance account has a $10,000 balance remaining related to this policy.

Question 2. You have been assigned to assist on the audit of Windsor Corporation for the year ended December 31, 2022. During the audit, you discover the following situations:

a. Depreciation of $3,200 on delivery vehicles was not recorded in 2022.

b. Cash of $5,600 received from a customer on account on December 31, 2022 was not recorded until January 4, 2023.

c. In 2022, the company sold for $3,700 cash fully depreciated machinery that originally cost $25,000. The company credited the proceeds of the sale to the Equipment account.

d. During November 2022, a competitor filed a patent infringement suit against the company seeking damages of $220,000. The attorney believes that an unfavorable verdict in the trial is probable, and a reasonable estimate of the damages the court will award is $125,000. The company has not made a journal entry to reflect this contingent loss.

e. At December 31, 2022, an analysis of payroll information shows that accrued salaries of $12,200 exist. The Salaries and Wages Payable account has a balance of $16,000 that was unchanged from its balance at December 31, 2021.

f. A large piece of equipment was purchased January 3, 2022 for $40,000 and was charged to Maintenance Expense. The equipment is estimated to have a useful life of 8 years and no residual value. The company normally uses the straight-line method of depreciation.

g. A $12,000 insurance policy was purchased on July 1, 2021. It covers a three-year period lasting until June 30, 2024. The $12,000 payment was charged to Insurance Expense in 2021.

h. A trademark was acquired at the beginning of 2021 for $50,000. No amortization has been recorded, but its useful life at purchase was 10 years.

Instructions:

Assume the clients books have not been closed for 2022, and that all amounts are considered material.

Prepare the necessary correcting journal entries. (Ignore income tax effects.)