Problem 22-7 You have been assigned to examine the financial statements of Sheri

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Problem 22-7 You have been assigned to examine the financial statements of Sheridan Company for the year ended December 31, 2017. You discover the following situations 1. Depreciation of $3,100 for 2017 on delivery vehicles was not recorded 2. The physical inventory count on December 31, 2016, improperly excluded merchandise costing $18,500 that 3. A collection of $6,000 on account from a customer received on December 31, 2017, was not recorded until 4. In 2017, the company sold for $3,800 fully depreciated equipment that originally cost $26,500. The company s. During November 2017, a competitor company filed a patent-infringement suit against Sheridan claiming had been temporanily stored in a public warehouse. Sheridan uses a periodic inventory system. January 2, 2018. credited the proceeds from the sale to the Equipment account. damages of $241,500. The company's legal counsel has indicated that an unfavorable verdict is probable and a reasonable estimate of the court's award to the competitor is $123,000. The company has not reflected or disclosed this situation in the financial statements 6. Sheridan has a portfolio of trading investments. No entry has been made to adjust to market. Information on cost and fair value is as follows Cost Fair Value December 31, 2016 December 31, 2017 $99,200 $84,800 $99,200 $82,700 7. At December 31, 2017, an analysis of payroll information shows accrued salaries of $12,300. The Salaries and wages Payable account had a balance of $16,700 at December 31, 2017, which was unchanged from its balance at December 31, 2016 A large piece of equipment was purchased on January 3, 2017, for $43,000 and was charged to Maintenance and Repairs Expense. The equipment is estimated to have a service life of 8 years and no residual value. Sheridan normally uses the straight-line depreciation method for this type of equipment A $12,300 insurance premium paid on July 1, 2016, for a policy that expires on June 30, 2019, was charged to insurance expense. 8. 9. A trademark was acquired at the beginning of 2016 for $47,700. No amortization has been recorded since its acquisition. The maximum allowable amortization period is 10 years 10. Assume the trial balance has been prepared but the books have not been closed for 2017. Assuming all amounts are material, prepare journal entries showing the adjustments that are required. (Ignore income tax considerations.) (Credit account titles are automatically indented when amount is entered. Do not indent manually, If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.) No. Account Titles and Explanation Debit Credit 1. 2. 3. s.

Explanation / Answer

Notes :

1. Refer Journal Entries 1,2,3,4,7,8,9 &10 : Errors in financial statements result from errors of omission (oversight), errors of commission (mathematical errors ) and misrepresentation of facts that existed when financial statements were first prepared. The Financial Accounting Standards Board (FASB) mandates that "Corrections of accounting errors in prior period are:

a. Accounted for as prior period adjustments;

b. Recorded in the year in which the error was discovered; and

c. Reported as an adjustment to the opening balance of Retained Earnings".

Where Comparative Financial Statements are presented, "Prior Period Financial Statements should be re-stated to correct the accounting error".

2. Refer Journal Entry 5.

FASB mandates that " if a Contingent Loss is both probable and estimable, then an Estimated Loss and Estimated Liability should be recognized, and accounted for in the financial statements at the amount so estimated.

The guiding considerations are the principles of conservatism and definition of liability. The general definition of liability is met when it is both probable and estimable".

Sheridan Company Journal No. Account Titles and Explanation Debit - $ Credit -$ 1 Depreciation          3,100                  Accumulated Depreciation          3,100 ( Being the entry to record depreciation on Vehicles for 2007. See Note 1 below on accounting for prior period Errors. This an error of omission). 2 Cost of Goods Sold (2016)       18,500       Retained Earnings ( Opening balance)       18,500 ( Being the entry to record correct errors in Inventory count in prior period financial statements - (See Note 1 below on Accounting for Errors. Error of Omission). 3 Cash/ Bank          6,000         Accounts Receivable          6,000 ( Being the accounting entry to record a collection on account from a Customer received in a prior period, but not accounted in the prior period financial statements. See Note 1 below for accounting for error of omission). 4 Accumulated Depreciation       26,500         Equipment       22,700         Gain on Sale of Fixed Assets          3,800 ( To record a correction of error of commission in accounting for sale of fully depreciated equipment in prior period financial statements). 5 Estimated Litigation Loss     123,000        Estimated Litigation Liability         123,000 (Being the entry to record the unfavorable verdict probable in the Patent infringement suit based on a reasonable estimate of the Court's award - See Note 2 below). 6 Unrealized Holding Gain / Loss          2,100           Fair Value (FV) Adjustment -Trading Invesment)          2,100 ( Being the entry to record adjustment in the carrying cost of Trading Investment to Fair Value) 7 Salaries Payable          4,400           Salaries Expense          4,400 (Being the entry to adjust opening balance in Salaries and wages Payable Account for salaries and wages accrued as at December 31, 2017. Accounting entry to correct an error of commission). 8 Depreciation on Equipment 5,375 Equipment 43,000           Maintenance and Repairs       43,000           Accumulated Depreciation          5,375 (Being the entry to correct an accounting error of commission made by debitting Maintenance and Repairs instead of Equipment account to record purchase of new equipment). 9 Insurance Expense          4,100 Prepaid Insurance          6,150           Retained Earnings       10,250 (Being the correction entry to correct the error in commission made in charging Insurance account instead of insurance prepaid). 10 Amortization on Trademark          4,770 Retained Earnings          4,770            Accumulated Amortization on Traademark          9,540 ( Being entry to record error of omission in accounting for amortization on Trademark in prior period financial statements).

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