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Accounting Changes and Error Corrections Tutorial (3753)

This document provides an accounting tutorial and examples for accounting changes, error corrections, and adjustments. It includes: 1) A practice problem with 4 items requiring journal entries to record changes in depreciation methods, changes in revenue recognition, prepaid expense adjustments, and sales tax expense corrections. 2) Two additional practice problems calculating adjustments to depreciation amounts and retained earnings for prior period errors. 3) Step-by-step solutions and journal entries for each practice problem to demonstrate the accounting entries required to correct for changes and errors.

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Rawan Yasser
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236 views3 pages

Accounting Changes and Error Corrections Tutorial (3753)

This document provides an accounting tutorial and examples for accounting changes, error corrections, and adjustments. It includes: 1) A practice problem with 4 items requiring journal entries to record changes in depreciation methods, changes in revenue recognition, prepaid expense adjustments, and sales tax expense corrections. 2) Two additional practice problems calculating adjustments to depreciation amounts and retained earnings for prior period errors. 3) Step-by-step solutions and journal entries for each practice problem to demonstrate the accounting entries required to correct for changes and errors.

Uploaded by

Rawan Yasser
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Accounting Changes and Error Corrections Tutorial

Practice Problem
Wangerin Company is in the process of adjusting and correcting its books at the end of 2017. In
reviewing its records, the following information is compiled.
1. At December 31, 2017, Wangerin decided to change the depreciation method on its office
equipment from double-declining-balance to straight-line. The equipment had an original cost of
$200,000 when purchased on January 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
$72,000. Wangerin has already recorded 2017 depreciation expense of $25,600 using the double-
decliningbalance method.
2. Before 2017, Wangerin accounted for its income from long-term construction contracts on the
completed-contract basis. Early in 2017, Wangerin changed to the percentage-of-completion
basis for accounting purposes. It continues to use the completed-contract method for tax
purposes. Income for 2017 has been recorded using the percentage-of-completion method. The
following information is available.
Pre-tax income
Percentage of Completion Completed Contract
Prior to 2017 $450,000 $315,000
2017 180,000 60,000

3. Insurance for a 12-month period purchased on November 1 of this year was charged to
insurance expense in the amount of $3,300 because “the amount of the check is about the same
every year.”
4. Reported sales revenue for the year is $1,908,000. This includes all sales taxes collected for
the year. The sales tax rate is 6%. Because the sales tax is forwarded to the state’s Department of
Revenue, the Sales Tax Expense account is debited. The bookkeeper thought that “the sales tax
is a selling expense.” At the end of the current year, the balance in the Sales Tax Expense
account is $103,400.
Instructions
Prepare the journal entries necessary at December 31, 2017, to record the above corrections and
changes. The books are still open for 2017. The income tax rate is 40%. Wangerin has not yet
recorded its 2017 income tax expense and payable amounts so current year tax effects may be
ignored. Prior-year tax effects must be considered in item 2.
Solution
1. Accumulated Depreciation—Equipment 9,600
Depreciation Expense 9,600

*Equipment cost $200,000


Depreciation before 2015 (72,000)
Book value $128,000
Depreciation recorded $25,600
Depreciation to be taken ($128,000/8) (16,000)
Difference $9,600

2. Construction in Process 135,000


Deferred Tax Liability 54,000*
Retained Earnings 81,000
*(450,000 – 315,000) X 40%

3. Prepaid Insurance (3,300 X 10/12) 2,750


Insurance Expense 2,750

4. Sales Revenue [1,908,000/(1.00 + 0.06) X 6% 108,000


Sales Taxes Payable 108,000
Sales Taxes Payable 103,400
Sales Taxes Expense 103,400

Practice Problem 2

A company used straight-line depreciation for an item of equipment that cost $12,000, had a
salvage value of $2,000, and had a five-year useful life. After depreciating the asset for three
complete years, the salvage value was reduced to $1,200 and its total useful life was increased
from 5 years to 6 years. Determine the amount of depreciation to be charged against the machine
during each of the remaining years of its useful life: 

Solution

Accumulated depreciation, end of year 3: [($12,000 - $2,000)/5 years]  3 years = $6,000


Depreciation, years 4 through 6: ($12,000 - $6,000 - $1,200)/3 years = $1,600
Practice Problem 3

Statement of Retained Earnings Dec 31, 2014

Balance, Jan 1 $1,050,000


Net income 360,000
Dividends (300,000)
Balance, Dec 31 $1,110,000

Before issuing the report for the year ended Dec 31, 2014, you discover a $62,500 error that
caused the 2013 inventory to be overstated. Assume a 20% tax rate.

Instructions

Prepare the statement of retained earnings with the prior-period adjustment.

Solution

You reported lower expenses so you had higher income which means you paid more taxes.
62,500 X 20% = $12,500 (taxes)
62,500 – 12,500 = 50,000 (increase in net income)
You do not need to decrease your net income by the $62,500 mistake because the government
collected more taxes of $12,500 from you, so you only need to adjust your retained earnings
downward by $50,000 (the difference).

Balance, Jan 1 $1,050,000


Prior period adjustment
Correction of error net of tax (50,000)
Balance as restated 1,000,000
Net income 360,000
Dividends (300,000)
Balance, Dec 31 1,060,000

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