Exercise 22-15 The first audit of the books of Buffalo Company was made for the

Question

Exercise 22-15

The first audit of the books of Buffalo Company was made for the year ended December 31, 2018. In examining the books, the auditor found that certain items had been overlooked or incorrectly handled in the last 3 years. These items are:

Prepare the journal entries necessary in 2018 to correct the books, assuming that the books have not been closed. Disregard effects of corrections on income tax.

1. At the beginning of 2016, the company purchased a machine for $534,000 (salvage value of $53,400) that had a useful life of 6 years. The bookkeeper used straight-line depreciation but failed to deduct the salvage value in computing the depreciation base for the 3 years. 2. At the end of 2017, the company failed to accrue sales salaries of $42,000 which was paid in 2018 and was debited to Salaries and Wages Expense. 3. A tax lawsuit that involved the year 2016 was settled late in 2018. It was determined that the company owed an additional $90,000 in taxes related to 2016. The company did not record a liability in 2016 or 2017 because the possibility of loss was considered remote, and charged the $90,000 to a loss account in 2018. 4. Buffalo Company purchased a copyright from another company early in 2016 for $54,000. Buffalo had not amortized the copyright because its value had not diminished. The copyright has a useful life at purchase of 20 years. 5. In 2018, the company wrote off $81,000 of inventory considered to be obsolete; this loss was charged directly to Retained Earnings.

Explanation / Answer

1. Depreciation A/C---------------------------------------------------------Dr. 17,800

To Machine A/C (8,900 * 2) 17,800

Profit and Loss A/C------------------------------------------------------Dr. 17,800

To Depreciation A/C 17,800

Notes: Depriciation that should have been charged considering salvage value = 534,000 - 53,400 / 6 = 80,100

Depreciation actually charged = 534,000 / 6 = 89,000

Difference = 89,000 - 80,100 = 8,900 multiplied by 2 years (from januray 2016 to december 2018) = 17,800 is the amount that has to be rectified.

2. Cash A/C------------------------------------------------------Dr. 42,000

To Accrued Salaries A/C 42,000

3. Profit and Loss A/C (Tax payable) ---------------------------------------------Dr. 90,000

To Cocerned Loss A/C 90,000

4. Profit and Loss A/C----------------------------------------------------------------Dr. 5,400

To Copyright Written off 5,400

Notes: Amount of 5,400 has been arrived as under = 54,000 /20 = 2,700 for 2 years (2016 to 2018) = 5,400

5.  Profit and Loss A/C--------------------------------------------------------------Dr. 81,000

To Retained Earnings A/C 81,000   

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