Accounting- The Diamond Glitter Company is in the process of preparing its financial statements for 2012

Question
Problems:

The Diamond Glitter Company is in the process of preparing its financial statements for 2012. Assume that no entries for depreciation have been recorded in 2012. The following information related 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 life of 7 years with a $25000 salvage value. The equipment is depreciated on a straight-line basis. On January 2, 2012, as a result of additional information, the company determined that the equipment has a remaining useful life of 3 years with a $15000 salvage value.

2. During 2012, the company changed from the double-declining-balance method for its building to the straight-line method. The building originally cost $625000. It had a useful life of 10 years and a salvage value of $50000. The following computations present depreciation on both bases for 2010 and 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 useful life of 10 years. The company’s bookkeeper recorded straight-line depreciation in 2010 and 2011 but failed to consider the salvage value.

4. The company has failed to accrue sales commissions payable at the 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 company discovered errors in its inventory-taking procedures that have caused inventories for the last 3 years to be incorrect, as follows. The company has already made an entry that established the incorrect 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 the straight -line method depreciation method on its retail display equipment from double-declining-balance. The equipment had an original cost of $250000 when purchased on January 1, 2011. It has a salvage value of 0 and a 8-year useful life. Depreciation expense recorded prior 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 income from long-term construction contracts on the completed-contract basis. Early this year, the company changed to the percentage-of-completion basis for accounting purposes but continues 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 following information 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, to record the corrections and changes made to date related to the information provided. The books are still open for 2012. The income tax rate is 35%. The company has not yet recorded its 2012 income tax expense and payable amounts so current-year tax effects may be ignored.

ANSWERS

1. Answer:

Cost of equipment

$ 165,000

Less: Salvage value

$25,000

Depreciable cost

$140,000

Depreciation to 2012

2009 ($140000/7)

$20,000

2010 ($140000/7)

$20,000

2011 ($140000/7)

$20,000

$60,000

Depreciation in 2012

Cost of equipment

$ 165,000

Less: Depreciation to 2012

$60,000

Book value (January 1, 2012)

$ 105,000

Less: Salvage value

$15,000

Depreciable cost

$90,000

Depreciation in 2012

Depreciation Expense

$ 30,000

Accumulated Depreciation—Equipment

$ 30,000

($90000/3)

2. Answer

Cost of Building

$ 625,000

Less: Depreciation to 2012

2010

115,000

2011

92,000

Book value (January 1, 2012)

$418,000

Less: Salvage value

50,000

Depreciable cost

$368,000

Depreciation in 2012

Depreciation Expense

$ 46,000

Accumulated Depreciation—Buildings

$ 46,000

($368000/8)

3. Answer

Depreciation Expense

42,500

Accum Depreciation—Machinery

42,500

Accum Depreciation—Machinery

3,750

Retained Earnings

3,750

Depreciation recorded in 2010:

($450000 ÷ 10) X .5 = $22500

Depreciation that should be recorded in 2010:

(($450000 – $25000) ÷ 10) X .5 = $21250

Depreciation recorded in 2011:

($450000 ÷ 10) = $45000

Depreciation that should be recorded in 2011:

(($450000 – $25000) ÷ 10) = $42500

Depreciation taken

Depreciation that should be taken

Differences

2010

$ 22,500

$ 21,250

$ 1,250

2011

$ 45,000

$ 42,500

$ 2,500

$ 67,500

$ 63,750

$ 3,750

4. Answer

Retained Earnings

$ 5,400

Sales Commissions Payable

$ 4,600

Sales Commissions Expense

$ 800

5. Answer

Cost of Goods Sold

60,500

Retained Earnings

51,000

Inventory

9,500

Income Overstated (Understated)

2010

2011

2012

Beginning inventory

$ 32,000

$ 51,000

Ending inventory

$ (32,000)

-51,000

9,500

($32,000)

($19,000)

$60,500

————————

6. Answers

Accumulated Depreciation—Equipment

$ 23,438

Depreciation Expense

$ 23,438

*Equipment cost

$250,000

Depreciation before 2012

$ (62,500)

Book value

$ 187,500

Depreciation recorded

$ 46,875

Depreciation to be taken

$ (23,438)

Difference

$ 23,438

7. Answer

Construction in Process

$140,000

Deferred Tax Liability

$ 49,000

Retained Earnings

$ 91,000

Tax liab=($320000 – $180000) X 35%