assigned to examine the financial statements of Jackson, Inc. for the year ended
ID: 2562840 • Letter: A
Question
assigned to examine the financial statements of Jackson, Inc. for the year ended December 31, 2017. You discover the following situations in February 2018 You discover the following situations in February 2018, 1. Brady has not accrued salaries payable at the end of each of the last 3 years, as follows. December 2015 $5,500 December 2016 $7,800 December 2017$7.000 2. The physical inventory count has been incorrectly counted resulting in the following errors. December 2015 Overstated $20,000 December 2016 Understated $16,500 December 2017 Overstated $6,000 3 Jackson, Inc. purchased $2,300 of supplies on December 19, 2017 recording a debit to Supplies and credit to Accounts Payable. The bill was paid on December 30, 2017, but not recorded until January 3, 2018 4. In 2017, the company sold for $3,500 equipment that had a book value of $2,000 and originally cost $30,000. The company credited the proceeds from the sale to the Equipment account. The company made the following entry Cash 3,500 Equipment 3,500 5. At December 31, 2017 Jackson, Inc. decided to change the depreciation method on its machinery from double-declining-balance to straight-line. The Machinery had an original cost of $100,000 when purchased on July 1, 2015. It has a 10-year useful life and no salvage value. Depreciation expense recorded prior to 2017 under the double-declining-balance method was $28,000. Jackson Inc. has already recorded 2017 depreciation expense of $14,400 using the double-declining- balance. 6. During November 2017, a competitor company filed a patent-infringement suit against Jackson, Inc. claiming damages of $150,000. 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 $85,000. The company has not reflected or disclosed this situation in the financial statements. 7. A $24,000 insurance premium paid on April 1, 2017 for a policy that expires on March 30, 2018, was charged to insurance expense. 8. A trademark was acquired at the beginning of 2014 for $50,000. No amortization has been recorded since its acquisition. The maximum allowable amortization period is 10 years.Explanation / Answer
Calculation of net Corrected Income for 2015, 2016 & 2017
Particulars
2015
2016
2017
Reported Net Income
560,000
580,000
620,000
Salary Expense (since salaries are not accrued)
(5,500)
(7,800)
(7,000)
Change in Inventories (See note 1)
(20,000)
(36,500)
(22,500)
Payment for supplies (only payment entry not made)
0
0
0
Sale of Equipment (See Note 2)
0
0
1,500
Change in Depreciation (See note 3)
5,000
8,000
4,400
Patent Infringement (See Note 4)
0
0
(85,000)
Prepaid Insurance (See Note 5)
0
0
6,000
Amortization of Trademarks ($50,000 / 10)
(5,000)
(5,000)
(5,000)
Commission Expense
(1,400)
(800)
(1,120)
Consignment
0
0
0
Net Corrected Income
533,100
537,900
511,280
Note 1: Error in counting of Inventories
December 2015: Inventories have been overstated by $20,000 due to net income is also overstated by $20,000. The same is required to be deducted from net income.
December 2016: Inventory of $16,500 is understated and the same will be added to the net income and the opening inventory is overstated by $20,000 and the same will also be added in net income of Dec 2016. Net amount of $36,500 will be deducted income
December 2017: Closing inventory is overstated by $6,000 and the same will be deducted from net income. Opening inventory is understated by $16,500 and the same will also be deducted.
Note 2: The sold equipment has book value of $2,000 and sold for $3,500. Therefore, there is a profit of $1,500 which is not recorded in the books. The same is required to be added in net income.
Note 3: Calculation of Depreciation as per new method and old method
Depreciation each year under Straight Line method = $100,000 / 10 = $10,000
December 2015 SLN Dep = 10,000 /12*6 = $5,000
December 2016 & 2017 SLN Dep = $10,000
Calculation of Depreciation under Double Declining Method
December 2015 = $100,000 / 10years x 2 /12*6 = $10,000.
December 2016 = ($100,000 – 10,000) / 10 x 2 = $18,000
Excess Depreciation Charged in December 2015 = $10,000 – 5,000 = $5,000
Excess Depreciation Charged in December 2016 = $18,000 – 10,000 = $8,000
Excess Depreciation Charged in December 2017 = $14,400 – 10,000 = $4,400
Note 4: Company is required to accrue liability of $85,000 in the books of account as the lawsuit has been filed and unfavorable verdict is probable. The company is required to provide for all the estimated expenses or losses.
Entry: Legal Expense Dr. 85,000
TO Provision for Legal Expenses 85,000
Note 5: The Company has booked whole insurance amount paid as expense. Out of $24,000, $18,000 pertains to year 2017 but remaining $6,000 pertains to expenses accruing in next year. Therefore, the same will be added in net income.
Particulars
2015
2016
2017
Reported Net Income
560,000
580,000
620,000
Salary Expense (since salaries are not accrued)
(5,500)
(7,800)
(7,000)
Change in Inventories (See note 1)
(20,000)
(36,500)
(22,500)
Payment for supplies (only payment entry not made)
0
0
0
Sale of Equipment (See Note 2)
0
0
1,500
Change in Depreciation (See note 3)
5,000
8,000
4,400
Patent Infringement (See Note 4)
0
0
(85,000)
Prepaid Insurance (See Note 5)
0
0
6,000
Amortization of Trademarks ($50,000 / 10)
(5,000)
(5,000)
(5,000)
Commission Expense
(1,400)
(800)
(1,120)
Consignment
0
0
0
Net Corrected Income
533,100
537,900
511,280
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