The Diamond Glitter Company is in the process of preparing its financial stateme

Question

The Diamond Glitter Company is in the process of preparing its financial statements for 2012. Assume that no entries for depreciation have been recorded in 2012. The following information related to depreciation of fixed assets is provided to you. 1. The company purchased equipment on January 2, 2009, for $165000. At that time, the equipment had an estimated useful life of 7 years with a $25000 salvage value. The equipment is depreciated on a straight-line basis. On January 2, 2012, as a result of additional information, the company determined that the equipment has a remaining useful life of 3 years with a $15000 salvage value. 2. During 2012, the company changed from the double-declining-balance method for its building to the straight-line method. The building originally cost $625000. It had a useful life of 10 years and a salvage value of $50000. The following computations present depreciation on both bases for 2010 and 2011. 2011 2010 Straight-line $ 57,500 $ 57,500 Declining-balance $ 92,000 $ 115,000 3. The company purchased a machine on July 1, 2010, at a cost of $450000. The machine has a salvage value of $25000 and a useful life of 10 years. The company's bookkeeper recorded straight-line depreciation in 2010 and 2011 but failed to consider the salvage value. 4. The company has failed to accrue sales commissions payable at the end of each of the last 2 years, as follows. December 31, 2011 $ 5,400 December 31, 2012 $ 4,600 5. In reviewing the December 31, 2011, inventory, the company discovered errors in its inventory-taking procedures that have caused inventories for the last 3 years to be incorrect, as follows. The company has already made an entry that established the incorrect December 31, 2012, inventory amount. December 31, 2010 Understated $ 32,000 December 31, 2011 Understated $ 51,000 December 31, 2012 Overstated $ 9,500 6. At December 31, 2012, the company decided to change to the straight -line method depreciation method on its retail display equipment from double-declining-balance. The equipment had an original cost of $250000 when purchased on January 1, 2011. It has a salvage value of 0 and an 8-year useful life. Depreciation expense recorded prior to 2012 under the double-declining-balance method was $62500. The company has already recorded 2012 depreciation expense of $46875 using the double-declining-balance method. 7. Before the current year, the company accounted for its income from long-term construction contracts on the completed-contract basis. Early this year, the company changed to the percentage-of-completion basis for accounting purposes but continues to use the completed-contract method for tax purposes. Income for the current year has been recorded using the new method. Prior year tax effects must be considered. The following information is available. Pretax Income Percentage-of-Completion Completed-Contract Prior to 2012 $320,000 $180,000 2012 $140,000 $120,000 Required: Prepare the journal entries necessary at December 31, 2012, to record the corrections and changes made to date related to the information provided. The books are still open for 2012. The income tax rate is 35%. The company has not yet recorded its 2012 income tax expense and payable amounts so current-year tax effects may be ignored.

Explanation / Answer

Solution:

Dec 1
Debit Accounts Receivable 21000
Credit Sales 21000

Dec 3
Debit Purchases 38000
Credit Accounts Payable 38000

Dec 5
Debit Freight In 290
Credit Cash 290

Dec 6
Debit Store Supplies 6360
Credit Accounts Payable 6360

Dec 8
Debit Purchases 36000
Debit Freight In 200 [If Lim Company added the freight to the bill]
Credit Accounts Payable 36200

Dec 12
Debit Accounts Payable 6000
Credit Purchases Returns and Allowances 6000

Dec15
Debit Accounts Receivable 12000
Credit Sales 12000

Dec 16
Debit Accounts Payable 2000
Credit Store Supplies 2000

Dec 17
Debit Cash 10000
Credit Sales 10000

Dec 18
Debit Sales Returns and Allowances 2000
Credit Accounts Receivable 2000

Dec 24
Debit Accounts Payable 32000 [38000 - 6000 returned]
Credit Cash 32000

Dec 25
Debit Cash 19000
Credit Accounts Receivable 19000 [21000 - 2000 returned]

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