Question

An auditor discovered an error while conducting Black Inc.'s 2016 audit. No errors were corrected during...

An auditor discovered an error while conducting Black Inc.'s 2016 audit. No errors were corrected during 2015.

A 2 year insurance policy was purchased on April 30, 2015. This policy resulted in $24,000 being debited to Prepaid Insurance (on April 30, 2015). However, no adjustment was made on December 31, 2015 or on December 31, 2016.

Required:

Prepare the appropriate journal entries. Assume the 2016 book have not been closed but the tax entries have been completed. The tax rate for all years is 40%. Apply US GAAP.

Please be careful with how taxes are affected by this transaction.

Homework Answers

Answer #1

Since the policy has been purchased so the appropriate entry would be:

April 30, 2015- Insurance policy a/c

To Bank a/c

But the company has wrongly debited Prepaid insurance, so

Adjusting entry would be;

April 30, 2015- Insurance policy a/c Dr 24000

To Prepaid Insurance a/c 24000

(Beinf prepaid insurance wrongly debited)

Since, prepaid insurance increased the tax value of the transaction by $24000*40%= $9600

So, putting the same into insurance policy investment account would result into decrease in tax of $9600.

So, adjusting entry for tax would be;

Provision for Tax a/c Dr 9600

To Profit and Loss a/c 9600

(being tax calculation reduced by $9600)

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