Conrad Playground Supply underwent a restructuring in 2016. The company conducte
ID: 2562082 • Letter: C
Question
Conrad Playground Supply underwent a restructuring in 2016. The company conducted a thorough internal audit, during which the following facts were discovered. The audit occurred during 2016 before any adjusting entries or closing entries are prepared.
a.
Additional computers were acquired at the beginning of 2014 and added to the company’s office network. The $48,000 cost of the computers was inadvertently recorded as maintenance expense. Computers have five-year useful lives and no material salvage value. This class of equipment is depreciated by the straight-line method.
b.
Two weeks prior to the audit, the company paid $20,000 for assembly tools and recorded the expenditure as office supplies. The error was discovered a week later.
c.
On December 31, 2015, merchandise inventory was understated by $84,000 due to a mistake in the physical inventory count. The company uses the periodic inventory system.
d.
Two years earlier, the company recorded a 4% stock dividend (2,600 common shares, $1 par) as follows:
Retained Earnings $2,600
Common Stock $2,600
The shares had a market price at the time of $12 per share.
e.
At the end of 2015, the company failed to accrue $116,000 of interest expense that accrued during the last four months of 2015 on bonds payable. The bonds, which were issued at face value, mature in 2020. The following entry was recorded on March 1, 2016, when the semiannual interest was paid:
Interest Expense $174,000
Cash $174,000
f.
A three-year liability insurance policy was purchased at the beginning of 2015 for $73,800. The full premium was debited to insurance expense at the time.
Required:
For each error, prepare any journal entry necessary to correct the error as well as any year-end adjusting entry for 2016 related to the situation described. (Ignore income taxes.) (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)
1. Record entry necessary for error correction.
2. Record adjusting journal entry for 2016.
3. Record entry necessary for error correction.
4. Record adjusting journal entry for 2016.
5. Record entry necessary for error correction.
6. Record adjusting journal entry for 2016.
7. Record entry necessary for error correction.
8. Record adjusting journal entry for 2016.
9. Record entry necessary for error correction.
10. Record adjusting journal entry for 2016.
11. Record entry necessary for error correction.
12. Record adjusting journal entry for 2016.
Conrad Playground Supply underwent a restructuring in 2016. The company conducted a thorough internal audit, during which the following facts were discovered. The audit occurred during 2016 before any adjusting entries or closing entries are prepared.
Explanation / Answer
1a. To correct the error:
Equipment (cost)..................................................................... 48,000
Accumulated depreciation ([$48,000 ÷ 5] x 2 years)............................ 19,200
Retained earnings ($45,000 – [$9,000 x 2 years])..................... ................ 28,800
2016 adjusting entry:
Depreciation expense ($48,000 ÷ 5) ........................................... 9,600
Accumulated depreciation............................................................. 9,600
b. To reverse erroneous entry:
Cash ..................................................................................... 20,000
Office supplies ............................................................................. 20,000
To record correct entry:
Tools .................................................................................... 20,000
Cash ............................................................................................ 20,000
Note: These entries can, of course, be combined.
c. To correct the error:
Inventory ......................................................................................... ..... 84,000
Retained earnings ..................................................................... ................ 84,000
d. To correct the error:
Retained earnings ([$12 x 2,600 shares] – $2,600).......................... 28,600
Paid-in capital – excess of par....................................................... 28,600
Note: A “small” stock dividend (<25%) requires that the market value of the additional shares be “capitalized.”
e. To correct the error:
Retained earnings (overstatement of 2015 income)....................... ... 116,000
Interest expense (overstatement of 2016 interest) .................................. 116,000
2016 adjusting entry:
Interest expense (4/6 x $174,000)............................................. 116,000
Interest payable (4/6 x $174,000)....................................................... 116,000
f. To correct the error:
Prepaid insurance ($73,800 ÷ 3 yrs x 2 years: 2016-2017) ............... 49,200
Retained earnings ($73,800 – [$72,000 ÷ 3 years]) .............................. 49,200
2016 adjusting entry:
Insurance expense ($73,800 ÷ 3 years) ......................................... ..... 24,600
Prepaid insurance ......................................................................... 24,600
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