You have been assigned to examine the financial statements of Mari, Inc. for the year ended December 31, 2023. You discover the following situations in February 2024.
1. On December 31, 2023, Mari, 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 January 2, 2022. It has a 10-year useful life and $5,300 salvage value. Depreciation expense recorded prior to 2023 under the double-declining-balance method was $20,000. Mari, Inc. has already recorded 2023 depreciation expense of $16,000.
2. The physical inventory count has been incorrectly counted resulting in the following errors.
December 2021 Overstated $7,600
December 2022 Understated $5,200
December 2023 Overstated $5,600
3. Mari, Inc. purchased $3,400 of supplies on September 4, 2023, recording a debit to Supplies Expense and credit to Cash. The Supplies account had a balance of $450 on January 1, 2023. A count revealed there were $700 on hand on December 31, 2023. No entries have been made to Supplies all year
4. In 2023, the company sold equipment for $7,200 that had a book value of $4,200 and originally cost $60,000. The company credited the proceeds from the sale to the Equipment account. The company made the following entry:
Cash 7,200
Gain on Sale of Equipment 7,200
5. Mari, Inc. has not recorded any depreciation for a machine they purchased on October 1, 2021. They paid $250,000 for the machine which has a salvage value of $10,000 and useful life of 6 years.
6. The company has estimated warranty expense to be 1.8% in the past and made an entry for $145,00 in 2023. However, the company decided that it should only be 1.6% this year which amounts to $125,000.
7. A trademark was acquired January 2, 2022 for $40,000. No amortization has been recorded since its acquisition. The maximum allowable amortization period is 10 years
8. A $24,000 insurance premium was paid on September 1, 2022, for a six month policy that expires on February 28, 2023, was charged to insurance expense in 2022
9. In July 2021, a competitor company filed a patent-infringement suit against Jordan, Inc. claiming damages of $140,000. In December 2021 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 made the following entry in 2023.
Patent-infringement Expense 85,000
Lawsuit Liability 85,000
10. Mari, Inc. has not accrued commissions payable at the end of each of the last 3 years, as follows. Salaries are expensed when paid the 1st week of January in 2024.
December 2021 $3,800
December 2022 $5,300
December 2023 $4,200
Reported Net Income is:
2021
$745,000
2022
$720,000
2023
$690,000
Instructions:
A. Assume the trial balance has been prepared but the books HAVE NOT been closed for 2023. Assuming all amounts are material, prepare journal entries showing the adjustments that are required. (Ignore income tax considerations).
B. Assume the trial balance has been prepared but the books HAVE been closed for 2023. Assuming all amounts are material, prepare journal entries showing the adjustments that are required. (Ignore income tax considerations).
C. Put together a schedule correcting net incomes for 2021, 2022 and 2023 assuming the books HAVE NOT been closed for 2023.
You have been assigned to examine the financial statements of Mari, Inc. for the year ended December 31, 2023. You discover the following situations in February 2024.
1. On December 31, 2023, Mari, 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 January 2, 2022. It has a 10-year useful life and $5,300 salvage value. Depreciation expense recorded prior to 2023 under the double-declining-balance method was $20,000. Mari, Inc. has already recorded 2023 depreciation expense of $16,000.
2. The physical inventory count has been incorrectly counted resulting in the following errors.
December 2021 Overstated $7,600
December 2022 Understated $5,200
December 2023 Overstated $5,600
3. Mari, Inc. purchased $3,400 of supplies on September 4, 2023, recording a debit to Supplies Expense and credit to Cash. The Supplies account had a balance of $450 on January 1, 2023. A count revealed there were $700 on hand on December 31, 2023. No entries have been made to Supplies all year
4. In 2023, the company sold equipment for $7,200 that had a book value of $4,200 and originally cost $60,000. The company credited the proceeds from the sale to the Equipment account. The company made the following entry:
Cash 7,200
Gain on Sale of Equipment 7,200
5. Mari, Inc. has not recorded any depreciation for a machine they purchased on October 1, 2021. They paid $250,000 for the machine which has a salvage value of $10,000 and useful life of 6 years.
6. The company has estimated warranty expense to be 1.8% in the past and made an entry for $145,00 in 2023. However, the company decided that it should only be 1.6% this year which amounts to $125,000.
7. A trademark was acquired January 2, 2022 for $40,000. No amortization has been recorded since its acquisition. The maximum allowable amortization period is 10 years
8. A $24,000 insurance premium was paid on September 1, 2022, for a six month policy that expires on February 28, 2023, was charged to insurance expense in 2022
9. In July 2021, a competitor company filed a patent-infringement suit against Jordan, Inc. claiming damages of $140,000. In December 2021 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 made the following entry in 2023.
Patent-infringement Expense 85,000
Lawsuit Liability 85,000
10. Mari, Inc. has not accrued commissions payable at the end of each of the last 3 years, as follows. Salaries are expensed when paid the 1st week of January in 2024.
December 2021 $3,800
December 2022 $5,300
December 2023 $4,200
Reported Net Income is:
2021
$745,000
2022
$720,000
2023
$690,000
Instructions:
A. Assume the trial balance has been prepared but the books HAVE NOT been closed for 2023. Assuming all amounts are material, prepare journal entries showing the adjustments that are required. (Ignore income tax considerations).
B. Assume the trial balance has been prepared but the books HAVE been closed for 2023. Assuming all amounts are material, prepare journal entries showing the adjustments that are required. (Ignore income tax considerations).
C. Put together a schedule correcting net incomes for 2021, 2022 and 2023 assuming the books HAVE NOT been closed for 2023.
Related questions
The Diamond Glitter Company is in the process of preparing itsfinancial statements for 2012. Assume that no entries fordepreciation have been recorded in 2012. The following informationrelated to depreciation of fixed assets is provided to you.
1. The company purchased equipment on January 2, 2009, for$165000. At that time, the equipment had an estimated useful lifeof 7 years with a $25000 salvage value. The equipment isdepreciated on a straight-line basis. On January 2, 2012, as aresult of additional information, the company determined that theequipment has a remaining useful life of 3 years with a $15000salvage value.
2. During 2012, the company changed from thedouble-declining-balance method for its building to thestraight-line method. The building originally cost $625000. It hada useful life of 10 years and a salvage value of $50000. Thefollowing computations present depreciation on both bases for 2010and 2011. | ||||
2011 | 2010 | |||
Straight-line | $ 57,500 | $ 57,500 | ||
Declining-balance | $ 92,000 | $ 115,000 | ||
3. The company purchased a machine on July 1, 2010, at a cost of$450000. The machine has a salvage value of $25000 and a usefullife of 10 years. The company's bookkeeper recorded straight-linedepreciation in 2010 and 2011 but failed to consider the salvagevalue. Ignore Tax effect.
4. The company has failed to accrue sales commissions payable atthe end of each of the last 2 years, as follows. | ||||
December 31, 2011 | $ 5,400 | |||
December 31, 2012 | $ 4,600 | |||
5. In reviewing the December 31, 2011, inventory, the companydiscovered errors in its inventory-taking procedures that havecaused inventories for the last 3 years to be incorrect, asfollows. The company has already made an entry that established theincorrect December 31, 2012, inventory amount. | ||||
December 31, 2010 | Understated | $ 32,000 | ||
December 31, 2011 | Understated | $ 51,000 | ||
December 31, 2012 | Overstated | $ 9,500 | ||
6. At December 31, 2012, the company decided to change to thestraight-line depreciation method on its retail display equipmentfrom double-declining-balance. The equipment had an original costof $250000 when purchased on January 1, 2011. It has a salvagevalue of 0 and a 8-year useful life. Depreciation expense recordedprior to 2012 under the double-declining-balance method was $62500.The company has already recorded 2012 depreciation expense of$46875 using the double-declining-balance method.
7. Before the current year, the company accounted for its incomefrom long-term construction contracts on the completed-contractbasis. Early this year, the company changed to thepercentage-of-completion basis for accounting purposes, butcontinues to use the completed-contract method for tax purposes.Income for the current year has been recorded using the new method.Prior year tax effects must be considered. The followinginformation is available. | ||||
Pretax Income | ||||
Percentage-of-Completion | Completed-Contract | |||
Prior to 2012 | $320,000 | $180,000 | ||
2012 | $140,000 | $120,000 | ||
Required: | |||
Prepare the journal entries necessary at December 31, 2012 torecord the corrections and changes made to date related to theinformation provided. The books are still open for 2012. The incometax rate is 35%. The company has not yet recorded its 2012 incometax expense and payable amounts so current-year tax effects may beignored. | |||
Bonita Company is in the process of adjusting and correcting itsbooks at the end of 2017. In reviewing its records, the followinginformation is compiled.
| 1. | Bonita has failed to accrue sales commissions payable at theend of each of the last 2 years, as follows. |
| December 31, 2016 | $3,300 | |
| December 31, 2017 | $2,300 |
| 2. | In reviewing the December 31, 2017, inventory, Bonitadiscovered errors in its inventory-taking procedures that havecaused inventories for the last 3 years to be incorrect, asfollows. |
| December 31, 2015 | Understated | $16,700 | ||
| December 31, 2016 | Understated | $19,000 | ||
| December 31, 2017 | Overstated | $6,000 |
Bonita has already made an entry that established the incorrectDecember 31, 2017, inventory amount.
| 3. | At December 31, 2017, Bonita decided to change the depreciationmethod on its office equipment from double-declining-balance tostraight-line. The equipment had an original cost of $90,000 whenpurchased on January 1, 2015. It has a 10-year useful life and nosalvage value. Depreciation expense recorded prior to 2017 underthe double-declining-balance method was $39,600. Bonita has alreadyrecorded 2017 depreciation expense of $11,600 using thedouble-declining-balance method. | |
| 4. | Before 2017, Bonita accounted for its income from long-termconstruction contracts on the completed-contract basis. Early in2017, Bonita changed to the percentage-of-completion basis foraccounting purposes. It continues to use the completed-contractmethod for tax purposes. Income for 2017 has been recorded usingthe percentage-of-completion method. The following information isavailable. |
Pretax Income | ||||
Percentage-of-Completion | Completed-Contract | |||
| Prior to 2017 | $141,700 | $94,900 | ||
| 2017 | 57,500 | 21,600 | ||
Prepare the journal entries necessary at December 31, 2017, torecord the above corrections and changes. The books are still openfor 2017. The income tax rate is 40%. Bonita has not yet recordedits 2017 income tax expense and payable amounts so current-year taxeffects may be ignored. Prior-year tax effects must be consideredin item 4. (Credit account titles are automaticallyindented when amount is entered. Do not indent manually. If noentry is required, select "No Entry" for the account titles andenter 0 for the amounts.)
$35,556 |
Working capital overstatedby $31,000 |
