Redding Company is in the process of closing its books at the end of 2018. The c

Question

Redding Company is in the process of closing its books at the end of 2018. The company's preliminary income statement for 2018 and its reported income statement for 2017 are given below. 2017 $480,000 240,000 240,000 (34,444) (87,000) 2018 $ 500,000 Sales Revenues Cost of Goods Sold Gross Profit Depreciation Other Expenses 250,000 (37,037) (98.000) $114.963 Net Income $ 118,556 Redding's records reveal the following information (1) Redding failed to accrue sales commissions expense at the end of 2016 and 2017 as follows 2016 2017 5,500 6,000

Explanation / Answer

a) Redding Company failed to accrue Sales Commission expense. Ideally it would have passed entry as below in 2016

2016- Sales Commission a/c dr 5500- This will be debited to P& L a/c

To Sales Commision payable a/c 5500-This will be reflected in Balance sheet.

When it is paid Sales commission payable a/c will be debited and Cash/ Bank a/c will be credited.

But here, Since 2016 and 2017 books are closed, Retained earnings has to be given effect for rectification. But since,Each sales commssion is paid and recorded in following year so the +/- amounts to correctly reflect are

2016- 5500

2017-500 because actual correct amount should be 6000 pertaining to 2017 but paid and recorded 5500 pertaining to 2016

2018-(6000)

Since 2018 books are not finalised we can credit the sales commission back to P& L a/c and the effect pertaining to 2016 and 2017 can be given to Retained earnings a/c

2018-Retained earnings a/c Dr 6000 (5500+500)

To Profit and Loss a/c 6000

(Being rectification entry passed)

2) Strainght line method dep=(110000-20000)/12=7500

Rate =100%/12=8.33

Double declining rate=8.33×2=16.67%

2015- 110000×16.67%=18337

2016-(110000-18337)×16.67%=15280

2017-(110000-18337-15280)×16.67%=12733

2018- Straight line method= (110000-18337-15280-12733-20000)/9=4850

Correct entry would have been

2018- Depreciation a/c Dr 4850- Transferred to P&L a/c

. To Machinery a/c 4850- Reflected in Balance sheet.

But it passed entry as per previous method

i.e( 110000-18337-15280-12733)×16.67%=10610

So the overcharge of Depreciation should be reversed

2018 Machinery a/ c dr 5760- A/c Reflected in Balance sheet.

To Depreciation a/c 5760- Transferred to P& L a/c

( Being rectification entry passed)

3) The Change in Inventory Valuation method from LIFO to FIFO results in retrospective change.

So the effect is given to retained earnings since COGS is changed for the years pertaining to 2016 and 2017 and the 2018 effect is given to Profit and loss a/c.

2018- Inventories a/c dr 15000 ( 10000+ 5000)

To Retained earnings a/c 15000

2018- Inventories a/c dr 10000

To Profit and Loss a/c 10000

(Being Inventory valuation method changes hence given effect)

b) Comparative Income statement

2018 2017

Sales Revenue 500000 480000

COGS (If FIFO method is used and also Sales commission effect is also given) 234000 235500

Gross profit 266000 244500

Depreciation (37037-5760) ( 31277 ) ( 34444)   

Other exp   

Net income

2018 2017

c) Retained earnings Comparitive statement 895000

1 st adjustment 6000 (500)

2nd adjustment 5760

3rd adjustment 10000 5000

  

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