You are the Finance Manager of Charlottetown Computer Inc., an electronics retailer. Your staff member has prepared draft financial statements as at/for the year ended December 31, 2021. (ie. all entries are done except for any corrections you propose.)

On review of the statements you note the following relating to events occurring in 2021:

1. Charlottetown signed a one-year lease in December 2021 for rental of a facility starting January 1, 2022. Upon signing the lease, Charlottetown paid the January 2022 rent of $10,000 and a damage deposit of $8,000, both of which the accountant recorded as rent expense in 2021.

2. Charlottetown purchased electronics inventory from a liquidation sale in December 2021, valued at $15,000, for $9,500. The accountant recorded the inventory at $15,000 and recorded the $5,500 difference between the amount paid and the value as a gain in the 2021 statements. The inventory has not yet been sold.

3. Charlottetown paid $8,000 for fancy stereo equipment for use in their store on Jan 1, 2021. The stereo is being depreciated straight line over 4 years. The majority shareholder of Charlottetown liked the stereo so much that she decided to take it home to use with her family.

4. Charlottetown also provides a service where it will go to customers homes/businesses to set up their purchases. A customer purchased a home computer system on December 20, 2021 and paid an additional $400 for this set-up service. The computer system was a holiday gift but the customer hadnt yet called by year end to book the set-up appointment. Charlottetown recorded the $400 revenue for the set-up as it is non-refundable.

5. Charlottetown was served with a lawsuit in November 2021 for a faulty product that caused a residential fire. The claim is $250,000 and Charlottetowns lawyer estimates that it is highly likely/probable they will have to pay $50,000 for this claim. Charlottetown did not record any amount in the financial statements related to the lawsuit as it will not go to court until late in 2022.

Required (State any assumptions needed):

For each letter item above, prepare the following:

1. Prepare any necessary journal entries for 2021 for Charlottetown Computer to correct any of the above treatments. If no adjustment is necessary, you must indicate No Entry. (Always show any calculations.)

2. EXPLAIN why you made the adjustment (or no adjustment) in (i) using and applying at least one FOUNDATIONAL principle or ELEMENT characteristic from the conceptual framework to the situation as support.