Question

Armstrong Inc. purchased a patent for $40,000 on 1/1/19 and accidentally expensed the entire amount. The...

Armstrong Inc. purchased a patent for $40,000 on 1/1/19 and accidentally expensed the entire amount. The patent is supposed to be amortized over its legal life of 10 years. The company noticed the error during 2020. How would Armstrong Inc. correct this error on 12/31/20, ignoring tax?

Credit Retained Earnings by $36,000.
No adjustment necessary since it fixed itself.
Debit Amortization Expense by $8,000.

Debit Patent by $40,000

A company changed from the LIFO cost flow assumption to the FIFO cost flow assumption. The changes caused an decrease in the prior year's income before taxes by $450,000, assuming the tax rate is 21%. What would be included in the journal entries to adjust the prior period accounts (including tax and inventory)?

Inventory debited by 94,500
Inventory debited by 450,000
Cost of Goods Sold debited by 355,500
Retained earnings debited by 355,500
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Answer #1
Accidentally expensed the entire amount=$ 40000
Actual amount to be expensed=40000/10=$ 4000
Excess expense charged=40000-4000=$ 36000
Excess expense means reduced net income
Hence, net income to be increased by $ 36000
Net income is included in retained earnings
Hence, credit retained earnings by $ 36000 to increase net income.
Answer is
Credit Retained Earnings by $36,000
Decrease in the prior year's income before taxes=$ 450000
Decrease in the prior year's income after taxes=450000*(100-21)%=$ 355500
Prior year income is included in retained earnings
Hence, debit retained earnings by $ 355500 to reduce income after taxes
Answer is
Retained earnings debited by 355,500
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