Question Two

The first audit of the books of Fenimore Company was made for the year ended December 31, 2018. In examining the books, the auditor found that certain items that resulted from changes in accounting policies, accounting estimates and errors had been overlooked or incorrectly handled in the last 3 years.

Instructions

1. Assuming that the books for 2018 have not been closed, prepare the correcting journal entries related to the following items. Disregard the effects of these corrections on income tax.

a) At the beginning of 2016, the company purchased a machine for $510,000 (residual value of $51,000) that had a useful life of 5 years. The bookkeeper used straight-line depreciation but failed to deduct the residual value in computing the depreciation base for the years 2016, 2017, 2018.

b) At the end of 2017, the company failed to accrue sales salaries of $45,000.

c) A tax lawsuit that involved the year 2013 was settled late in 2018. It was determined that the company owed an additional $85,000 in taxes related to 2016. The company did not record a liability in 2016 or 2017 because the possibility of loss was considered remote and debited the $85,000 to a loss account in 2015 and credited Cash for the same amount.

d) Fenimore Company purchased a copyright from another company early in 2016 for $50,000. Fenimore had not amortized the copyright because its value had not diminished. The copyright has a useful life at purchase of 20 years.

e) In 2018, the company wrote off $87,000 of inventory considered to be obsolete; this loss was charged directly to Retained Earnings and credited to Inventory.

f) Year-end salaries and wages payable of $3,400 were not recorded because the bookkeeper thought that they were immaterial.

g) Insurance for a 12-month period purchased on November 1 of this year was charged to insurance expense in the amount of $3,300 because the amount of the cheque is about the same every year.

h) Reported sales revenue for the year is $1,908,000. This includes all sales taxes collected for the year. The sales tax rate is 6%. Because the sales tax is forwarded to the Department of Revenue, the Sales Tax Expense account is debited. The bookkeeper thought that the sales tax is a selling expense. At the end of the current year, the balance in the Sales Tax Expense account is $103,400.