Teddy, Inc., is a manufacturer of high-tech industrial parts that was started in 2003 by two talented engineers with little business training. In 2016, the company was acquired by one of its major customers. As part of an internal audit, the following facts were discovered. The audit occurred during 2016 before any adjusting entries or closing entries were prepared The income tax rate is 40% for all years 1. A five-year casualty insurance policy was purchased at the beginning of 2014 for $45,000. The full amount was debited to insurance expense at the time Effective January 1, 2016, the company changed the salvage values used in calculating depreciation for its office building. The building cost was S900,000 on December 29, 2005, and has been depreciated on a straight-line basis assuming a useful life of 40 years and a salvage value of $100,000. Declining real estate values in the area indicate that the salvage value will be no more than $40,000 On December 31, 2015, merchandise inventory was overstated by S30,000 due to a mistake in the physical inventory count using the periodic inventory system. Assume that Teddy already prepared the journal entries to record COGS before any adjustments. The company changed inventory cost methods to FIFO from LIFO at the end of 2016 for both financial statement and income tax purposes. The change will cause a $900,000 increase in the beginning inventory at January 1, 2017. Assume that Teddy already prepared the journal entries to record COGS before any adjustments. At the end of 2015, the company failed to accrue $25,000 of sales commissions earned by employees during 2015. The expense was recorded when the commissions were paid in early 2016 At the beginning of 2014, the company purchased a machine at a cost of $690,000. Its useful life was estimated to be ten years with no salvage value. The machine has been depreciated by the double- declining balance method. Its carrying amount on December 31,2015, was $580,000. On January 1, 2016, the company changed to the straight-line method. Warranty expense is determined each year as 2% of sales. Actual payment experience of recent years indicates that I .5% is a better indication of the actual cost. Management effects the change in 2016 Credit sales for 2016 are $5,000,000; in 2015, they were $4,000,000 2. 3. 4. 5. 6. 7. Net income before tax and before any of the above adjustments is S3 million for 2016. Required: 1. Provide journal entries as needed for each of the above transactions. Any tax effects should be adiusted for through Income tax payable or Refund receivable-income tax. For each transaction, explain why you made certain adjustments (or corrections) 2. Compute the net income (after tax) after the above adjustments for 2016. You do not have to prepare an income tax provision for 2016 3. Compute the retained earnings after the above adjustments for 2016. In 2015, Teddy reported retained earnings (before any of the adjustments) of $5,000,000 4. Using the Excel spreadsheet posted to LEARN, post your adjusting (correcting) journal entries and prepare the adjusted trial balance
