QUESTION 4 (20 Marks)

Ridley Corporation is in the process of adjusting and correcting its books at the end of 2020. In reviewing its records, the following information was discovered. Prepare the journal entries necessary at December 31, 2020, to record the corrections and changes. The books are still open for 2020. The income tax rate is 40%. The company has not yet recorded its 2020 income tax expense and payable amounts so current-year tax effects may be ignored. Prior-year tax effects must be considered in item 4.

1. The company did not accrue sales commissions payable at the end of each of the last 2 years, as follows.

December 31, 2019	$19,000
December 31, 2020 (3 marks)	$11,000

2. In reviewing the December 31, 2020, inventory, Ridley discovered errors in its inventory taking procedures that have caused inventories for the last 3 years to be incorrect, as follows.

December 31, 2018	Understated	$16,000
December 31, 2019	Understated	$19,000
December 31, 2020	Overstated	$ 6,700

The company has already made an entry that established the incorrect December 31, 2020, inventory amount.

(6 marks)

3. At December 31, 2020, Ridley decided to change the depreciation method on its office equipment from double-declining-balance to straight-line. The equipment had an original cost of $100,000 when purchased on January 1, 2018. It has a 10-year useful life and no residual value. Depreciation expense recorded prior to 2020 under the double-declining- balance method was $36,000. The company has already recorded 2020 depreciation expense of $12,800 using the double-declining-balance method.

(6 marks)

4. Before 2020, Ridley accounted for its income from long-term construction contracts on the cost-recovery basis. Early in 2020, the company changed to the percentage-of- completion basis for accounting purposes. It continues to use the cost-recovery method for tax purposes. Income for 2020 has been recorded using the percentage-of-completion method.

Pretax Income from

	Percentage-of-Completion	Cost-Recovery
Prior to 2020	$150,000	$105,000
2020 (3 marks)	60,000	20,000

5. A collection of $5,600 on account from a customer received on December 31, 2020, was not recorded until January 2, 2021.

(2 marks)