Question

Complete the necessary entries as at December 31, 2017. Each item is independent of the others. If applicable, the income tax rate is 25%. Ignore GST. Assume that adjusting entries are made only at year end which is December 31.

1. A company that uses a perpetual inventory system made $110,000 worth of purchases throughout 2017. At the end of the year it was discovered that a $20,000 purchase made in December had been recorded incorrectly. When the December purchase was recorded, the accountant debited cost of goods sold and credited cash. At the beginning of the year, the company had an inventory balance of $78,000 and after their year-end inventory count determined that they had $31,000 on hand. Record any adjusting entries required.

2. A company purchased a 12-month insurance policy on November 1, 2017. The policy had a cost of $36,000 and when the policy was purchased, the accountant debited insurance expense and credited cash. At the end of the year, the accountant who made the initial error, attempted to correct the error by debiting prepaid insurance and crediting insurance expense for $6,000. Record any adjusting entries required.

3. A company purchased equipment on March 1, 2017 for $80,000. The equipment is estimated to have a 10-year useful life and a residual value of $8,000. Due to poor performance, the company sold the equipment on November 1, 2017 for $72,000 and at that time the accountant debited cash for $72,000 and credited equipment for the same amount. At the end of the year, the company had a balance of $4,800 in the accumulated depreciation account associated with that piece of equipment. The company uses the straight-line method of depreciation. Record any adjusting entries required.

4. Property taxes relate to the calendar year. The first time that the company recorded property taxes was when it received a notice from the City informing them that their property taxes for 2017 would be $18,000. The notice was received on April 1, 2017. At that time the company's accountant recorded a debit to prepaid property taxes and a credit to property taxes payable for $18,000. When the taxes were paid on July 1, 2017, the accountant debited property tax payable and credited cash for $18,000. Record all adjustments needed at year end.

Required:

Prepare the correcting entry for the following situations above. Do NOT reverse the original entry and re-do it correctly. Simply correct the error(s) that have been made.

Basically, you are to look for the error that has been made but formulates the correct adjusting entries for each scenario.

Answer 1

	2	Total Insurance expence=(36000/12)*2	$6,000
		Prepaid Insurance at end of year	$30,000	(36000-6000)
	3	Depreciation for the year=((80000-8000)/10)*(7/12)	$4,200
		Book Value at the time of sale=80000-4200	$75,800
		Sales Price	$72,000
		Loss on Sales=75800-72000	$3,800
		ADJUSTING ENTRY
	Ref	ACCOUNT TITLES	DEBIT	CREDIT
	1	Inventory	$20,000
		Cost of goods sold		$20,000
	2	Prepaid Insurance	$24,000		(30000-6000)
		Insurance Expense		$24,000
	3	Accumulated Depreciation	$4,800
		Loss on Sale of Equipment	$3,800
		Equipment		$8,000	(80000-72000)
		Depreciation expense		$600	(4800-4200)
	4	Property Tax Expenses	$18,000
		Prepaid Property taxes		$18,000