Accounting -Team-based identification of errors and corrections

| January 30, 2017

Question

WELCOME TO THE WORLD OF ACCOUNTING |

I-01.07

Team-based identification of errors and corrections
Efendi Company hired an accounting intern, Pat Morgan, to prepare its income statement, statement of
retained earnings, and balance sheet. Pat indicated a reluctance to undertake this task due to a lack of adequate training. But, Pat agreed provided someone would examine the work in detail and provide useful
suggestions for improvement. Pat’s work follows:

PAT MORGAN’S
Income Statement
December 31, 20X5
Net income
Services to customers

$125,000

Expenses
Dividends

$13,500

Rent

 11,000

Revenues

21

  24,500
$100,500

PAT MORGAN’S
Statement of Retained Earnings
For the Year Ending December 31, 20X1
Beginning retained earnings

$ 45,000

Plus: Net income

 100,500
$145,500

Less: Capital stock

 200,000

Ending retained earnings

$ (54,500)

22

PAT MORGAN’S
Equation Sheet
December 31, 20X1
Assets
Cash

$ 92,700

Accounts receivable

37,400

Equipment

 239,000

Total assets

$369,100

Liabilities
Accounts payable

$ 7,500

Wages expense

 64,000

Total expenses

$ 71,500

Stockholders’ equity
Notes payable

$80,100

Retained earnings

 (54,500)

Total stockholders’ equity
Total liabilities and equity

(a)

  25,600
$ 97,100

Find specific errors in Pat’s work. Prepare written review notes for Pat sufficient to allow Pat to
understand the errors and make necessary corrections. To get you started, you may assume Pat did
manage to get the listing of total assets correct.

40

B-02.02

Debit/Credit rules and normal balances
Review the following list of accounts, and indicate the debit/credit rules for the account, as well as the account’s normal balance. The first one is done as an example.
Increased with a:
(a)

Cash

(b)

Credit

Debit

Revenues

(e)

Debit

Accounts Payable

(d)

Normal Balance:

Capital Stock

(c)

Decreased with a:

Rent Expense
continued…

INFORMATION PROCESSING |
Increased with a:
(f )

Dividends

(h)

Utilities Expense

(i)

Accounts Receivable

(j)

Normal Balance:

Equipment

(g)

Decreased with a:

41

Loan Payable

Basic journal entries
Mo Lambert formed a corporation to provide concrete construction work. His jobs typically involve building
parking lots, drives, and foundations. Mo provided the following information about transactions occurring
during the first month of operation. Evaluate the transactions and prepare journal entries for this activity.
Jan. 2, 20X5

Mo Lambert invested $10,000 cash in the capital stock of the newly formed corporation.

Jan. 4, 20X5

Purchased equipment on account for $7,500.

Jan. 12, 20X5

Received $15,000 from customers for services rendered.

Jan. 15, 20X5

Received a bill for construction supplies used in the amount of $2,000.

Jan. 18, 20X5

Provided $3,200 of services on account.

Jan. 20, 20X5

Paid employees $2,300 for wages earned.

Jan. 22, 20X5

Collected 60% of the amount due for the work provided on January 18.

Jan. 23, 20X5

Paid 40% of the amount due on the equipment purchased on January 4.

Jan. 25, 20X5

Purchased (and immediately used) construction supplies for cash in the amount of $600.

Jan. 31, 20X5

The company paid Mo Lambert a $1,500 dividend.

B-02.03

|

Revenue recognition principles
Accounting “failures” occur when reported results are not presented in accordance with generally accepted accounting principles. These failures can produce significant financial losses to investors and creditors.
Oftentimes, an accounting failure results from an incorrect application of revenue recognition concepts.

75

B-03.02

76
Revgression Corporation included each of the following described transactions in revenue during 20X5.
Three of these transactions were appropriate, and three were not. Determine which are “ok” and which are
“not ok.”
(1)

Goods were sold and shipped in late 20X5, but the product still requires substantial installation and
setup services. The price and terms of sale stipulate that seller must satisfactorily complete all installation and setup at the buyer’s location.

(2)

Goods were produced according to a customer purchase order, but had not yet been shipped by
the end of 20X5.

(3)

Goods were delivered to customers during early 20X5, but the customers had ordered and paid for
the goods during 20X4.

(4)

Customers purchased goods and services during late 20X5, but credit terms permitted them to
delay payment until early 20X6. Full payment is expected eventually.

(5)

Advance payment from a customer in a foreign country was received in 20X5, for services to be
provided in 20X6.

(6)

Goods were purchased and paid for by customers during 20X5, but customers may return
defective goods for warranty work or a refund. The expected warranty/refund claims are subject to
reasonable estimation and not anticipated to be significant.

B-03.03

Expense recognition principles
The recognition of an expense usually occurs based on one of the following three intrinsic principles:
(a)

Associating cause and effect

(b)

Systematic and rational allocation

(c)

Immediate recognition

Evaluate the following items and determine the intrinsic principle that establishes the basis by which it is to
be recorded as an expense.
(1)

The cost of a building used in the business.

(2)

The cost of merchandise sold to customers.

(3)

Rental costs under a three-year lease agreement.

(4)

The cost of a rebate offered on goods sold to customers.

(5)

An uninsured storm loss.

(6)

Commissions paid to a sales person.

I-03.03

Business papers and adjustments
Identification of items in need of adjustment is not automatic. It requires careful monitoring of the business
environment, and can entail assessment of information found on various source documents within the
business organization. This problem introduces typical “business papers” that document transactions of the
W. Brian Voss Company. You are to examine the provided information, and determine what related adjusting entry is needed for each item on December 31, 20X1.
(a)

Following is a deposit ticket. This item is usually prepared to accompany money that is taken to a
bank for deposit to the company’s bank account. The W. Brian Voss Company provides security
services, and the following deposit was from a customer that fully prepaid a 6-month contract
commencing on the date of the deposit. The proceeds were initially entered into Voss’s Unearned
Revenue account.

|
W. Brian Voss Company
6th Avenue
Austin, TX

D. Dutter

4567654

Account #
Date

Cash and coins
Checks:

$750.00

TOTAL

$750.00

November 1, 20X1

Austin Capital Bank
(b)

The W. Brian Voss Company wrote these checks to purchase supplies during 20X1. Voss began the
year with $1,297 of supplies on hand. At year’s end, only $560 of supplies remained. Each of these
transactions was initially recorded in the Supplies account, and no adjusting entries were made
during the year.

W. Brian Voss Company
6th Avenue
Austin, TX

Pay to the order of:

Check #
Date:

Everything Office Supply Company

11034
  January 5, 20X1  

$1,175.00

*************ONE-THOUSAND, ONE-HUNDRED SEVENTY-FIVE AND NO/100 DOLLARS*************

Austin Capital Bank

MEMO

office supplies

W. Brian Voss Company
6th Avenue
Austin, TX

Pay to the order of:

W. Brian Voss
Check #
Date:

Ink Jet Now Company

11164
    June 6, 20X1   

$90.00

**********************************NINETY AND NO/100 DOLLARS**********************************

Austin Capital Bank

MEMO

office supplies

W. Brian Voss Company
6th Avenue
Austin, TX

Pay to the order of:

W. Brian Voss

Check #
Date:

Everything Office Supply Company

11202
November 5, 20X1

$940.00

**************************NINE-HUNDRED, FORTY AND NO/100 DOLLARS**************************

Austin Capital Bank

MEMO

office supplies

W. Brian Voss

83

84
The W. Brian Voss Company purchased a new computer. The company estimates that the computer
will last four years, and have no salvage value at the end of the four-year period. Following is the
invoice that was received at the time the computer was purchased.

(c)

DEAL COMPUTER COMPANY
1825 Pecan
Pflugerville, TX

Bill To:

Invoice #34848

W. Brian Voss Company
6th Avenue
Austin, TX

P.O. NUMBER
593CCG

INVOICE DATE
July 1, 20X1

F.O.B. POINT
Austin

TERMS
30 days

QTY.

PART #

DESCRIPTION

1

PC4456

MegaPlex Computer w/FlexPlex Monitor

UNIT PRICE
$2,424

$2,424

TOTAL

THANK YOU FOR YOUR BUSINESS!

(d)

TOTAL

$2,424

The W. Brian Voss Company received the following electric utility bill. It has not been recorded into
the accounts.

AUSTIN POWER AND LIGHT
711 Capitol Avenue
Austin, TX
ELECTRIC UTILITIES
Your payment is due by January 15
W. Brian Voss Company
6th Avenue
Austin, TX
Amount Due

$374.00

Account #

0707BB6AVATX

Electric utility service for December, 20X1 – meter #5340757
Meter Read:
Prior month

334346

End of current month

338086

Current months usage

3740 KWH

Rate

X 0.1
374

(e)

W. Brian Voss leases office space from Trammell Raven Property Management Company. The leasing
market was very soft at that time the lease agreement was struck, and the lease includes terms that
are very favorable to Voss. Below is the lease agreement. No entry has been recorded for this lease.

LEASE AGREEMENT
This agreement is entered into by and between TRAMMELL RAVEN PROPERTY MANAGEMENT
COMPANY (lessor) and W. Brian Voss Company, (lessee). Lessee agrees to lease from lessor the office space described as 6th Avenue, Austin, Texas.
The term of the lease shall be for 4 years commencing on January 1, 20X1 and continuing until
December 31, 20X4. The annual rental rate is $20,000. Lessee is hereby granted the option to renew
and extend the lease for one additional successive four-year period at the then prevailing market
rate of rent.
Rent is payable in arrears, annually, on the 1st day of each year following the year of use. The first
payment is due January 1, 20X2 (for the preceding year), and continues in similar fashion thereafter
for the duration of the lease, including periods of renewal and extension.
Lessor is responsible for all taxes, insurance, and property maintenance. Lessee is responsible for
all electric utilities. Lessee agrees to use reasonable care in protecting and preserving the quality of
the property covered by this lease.
Date: January 1, 20X1

Trammel Raven

W. Brian Voss

for TRPMC

for W. Brian Voss Company

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