HWI9: Error Correction
Applicable Company accounting policies: 1. Mr.Speakers rounds all transactions to the nearest dollar.
In preparation for taking the company public, Mr.Speakers is currently (beginning of 2019) undergoing its first ever financial statement audit covering 2016-2018. The auditors have uncovered the following problems: 1) On February 28th, 2017 (HW5, #6) Mr.Speakers failed to book sufficient cash, sales tax due, and revenue based on the description of the records of the company. COGS appears to be correct for the transaction. (HINT: Look at the key and recalculate the correct numbers based on the description of the transaction in HW5, some of you may already have the correct numbers calculated in your work, and those of you who were in class know where to find them if you don’t.) 2) Both of the warranty expense/liability journal entries, also made on 2/28/2017, appear to be incorrect as well, based on the company’s transaction records (HW4, 5). 3) These errors also affect the tax calculation for 2017 because of the effects on net income and the fact that warranty expenses are not deductible for tax purposes until actually incurred (remember, we’re only estimating them right now).
Requirements:
1) Provide the CORRECT journal entries (what should they have been) for: a. The initial sale and sales tax due.
Cash 180978 Revenue 164525 Sales Tax Due 16453 b. The warranty liability estimates.
Warranty Expense 2869 Warranty Liability 2869
Warranty Expense 1300 Warranty Liability 1300 c. The tax journal entry.
Tax Expense 24440
DTA – ST 12305 DTL – ST 8340 DTL – LT 1278 Income tax Payable 27127 2) Including income tax effects, which income statement and balance sheet accounts were affected by the error and how (i.e., should they be higher or lower than what was actually recorded)?