Question

An auditor discovered an error while conducting Purple Inc.'s 2016 audit. Also, no errors were corrected during 2015.

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

Required:

Prepare the appropriate journal entries while assuming the 2016 books have not yet been closed but the tax entries have been completed. The tax rate for this entire problem is 40%. Apply US GAAP. Please be careful with how taxes are affected by this transaction.

Answer 1

Costs incurred during 2015 for insurance that will not take place for the first time until 2016				8,000
($24,000 x 8/24)
Deferred income tax liability that would have been recognized at December 31, 2015, computed at 40% of the temporary difference				3,200
Net adjustment to beginning assets and liabilities				4,800