The first audit of the books of Felicia Company was made for the year ended December 31, 2019. In examining the books, the auditor found that certain items had been overlooked or incorrectly handled in the last 3 years. These items are:

1. At the beginning of 2017, 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 3 years.

2. At the end of 2018, the company failed to accrue sales salaries of $45,000.

3. A tax lawsuit that involved the year 2017 was settled late in 2019. It was determined that the company owed an additional $85,000 in taxes related to 2017. The company did not record a liability in 2017 or 2018 because the possibility of loss was considered remote, and debited the $85,000 to a loss account in 2019 and credited Cash for the same amount.

4. Fenimore Company purchased a copyright from another company early in 2017 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.

5. In 2019, the company wrote off $87,000 of inventory considered to be obsolete; this loss was charged directly to Retained Earnings and credited to Inventory.

INSTRUCTIONS: SOLVE WITH 4 STEP PROCESS

- Prepare a journal entry to correct any balances.

- Retrospectively restate prior years financial statements that were incorrect.

- Report correction as a prior period adjustment if retained earnings is one of the incorrect accounts affected.

- Include a disclosure note.