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You have been assigned to examine the financial statements of Kobe, Inc. for the year ended December 31, 2020. You discover the following situations in

You have been assigned to examine the financial statements of Kobe, Inc. for the year ended December 31, 2020.  You discover the following situations in February 2021.

 

  1. Kobe, Inc. has not accrued salaries payable at the end of each of the last 3 years, as follows.

Salaries are expensed when paid.

                                    December 2018        $4,900

                                    December 2019        $5,800

                                     December 2020        $3,900

 

  1. The physical inventory count has been incorrectly counted resulting in the following errors.

                                    December 2018     Understated   $16,400

                                     December 2019     Overstated     $ 6,800

                                    December 2020     Overstated     $ 8,000

                  

  1. Kobe, Inc. purchased $4,500 of supplies on December 2, 2020 recording a debit to Supplies and credit to Accounts Payable. The bill was paid on December 29, 2020, but not recorded until January 2, 2021.

 

  1. In 2020, the company sold for $3,500 equipment that had a book value of $2,000 and originally cost $30,000.  The company credited the proceeds from the sale to the Equipment account. The company made the following entry:

 

                  Cash                     3,500

                        Equipment                  3,500

  

  1. At December 31, 2020 Kobe, Inc. decided to change the depreciation method on its machinery from double-declining-balance to straight-line.  The Machinery had an original cost of $100,000 when purchased on July 1, 2018.  It has a 10-year useful life and no salvage value.  Depreciation expense recorded prior to 2020 under the double-declining-balance method was $28,000. Kobe, Inc. has already recorded 2020 depreciation expense of $14,400 using the double-declining balance.

 

  1. During November 2019, a competitor company filed a patent-infringement suit against Kobe, Inc. claiming damages of $150,000.  In December 2019 the company’s legal counsel has indicated that an unfavorable verdict is probable and a reasonable estimate of the court’s award to the competitor is $70,000.  The company has not reflected or disclosed this situation in the financial statements.

  

  1. A $24,000 insurance premium paid on June 1, 2020 for a policy that expires on May 31, 2021, was charged to insurance expense.

 

  1. A trademark was acquired January 5, 2018 for $50,000.  No amortization has been recorded since its acquisition.  The maximum allowable amortization period is 10 years.

  

  1. Kobe, Inc. has not recorded any depreciation on their computer equipment for 2018-2020.  It was acquired at the beginning of 2018 for $130,000, has a salvage value of $10,000 and useful life of 4 years.

 

 

 

 

 

  1. The December utilities bills have been expensed in January, the following month, when paid. Utilities payable on December 31 of each year were as follows.

 

2018                $750

2019                  800

2020                  880

 

 

      Reported Net Income is:

      2018

$750,000

      2019

$630,000

      2020

$580,000

 

 

Instructions

  1. Assume the trial balance has been prepared but the books HAVE NOT been closed for 2020.  Assuming all amounts are material, prepare journal entries showing the adjustments that are required.  (Ignore income tax considerations).   
  2. Assume the trial balance has been prepared but the books HAVE been closed for 2020.  Assuming all amounts are material, prepare journal entries showing the adjustments that are required.  (Ignore income tax considerations).   
  3. Complete the excel schedule correcting net income for 2018, 2019 and 2020 assuming the books HAVE NOT been closed for 2020.

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Answer Notes I Books are to be prepared on an accrual basis Hence provisions are to be created for expenses accrued even though not paid Hence salary accrued for relevant years is to be booked in the ... blur-text-image

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