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Homework answers / question archive / Patricia Voga Company is in the process of adjusting and correcting its books at the end of 2008

Patricia Voga Company is in the process of adjusting and correcting its books at the end of 2008

Business

Patricia Voga Company is in the process of adjusting and correcting its books at the end of 2008. In reviewing its records, the following information is complied.

1. Voga has failed to accrue sales commissions payable at the end of each of the last 2 years, as follows.

December 31, 2007 $4,000
December 31, 2008 $2,500

2. In reviewing the December 31, 2008, inventory, Voga discovered errors in its inventory-taking procedures that have caused inventories for the last 3 years to be incorrect, as follows.

December 31, 2006 Understated $16,000
December 31, 2007 Understated $21,000
December 31, 2008 Overstated $ 6,700
Voga has already made an entry that established the incorrect December 31, 2008, inventory amount.

3. At December 31, 2008, Voga decided to change the depreciation method on its office equipment from double-declining balance to straight-line. The equipment has an original cost of $100,000 when purchased on January 1, 2006. It has a 10-year useful life and no salvage value. Depreciation expense recorded prior to 2008 under the double-declining balance method was $36,000. Voga has already recorded 2008 depreciation expense of $12,800 using the double-declining balance method.

4. Before 2008, Voga accounted for its income from long-term construction contracts on the completed-contract basis. Early in 2008, Voga changed to the percentage-of-completion basis for accounting purposes. It continues to use the completed-contract method for tax purposes. Income for 2008 has been recorded using the percentage-of-completion method. The following information is available.

Pretax Income

Percentage-of-completion Completed-Contract

Prior to 2008 $150,000 $95,000
2008 60,000 20,000

Instructions: Prepared the journal entries necessary at December 31, 2008, to record the above corrections and changes. The books are still open for 2008. The income tax rate is 40%. Voga has not yet recorded its 2008 income tax expense and payable amounts so current-year tax effects may be ignored. Prior-year tax effects must be considered in item 4.

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 Record the total liability to sales commissions payable, but split the debit part of the entry to current year and prior year. You don't want 2007 expense in the 2008 accounting. That portion is a prior period adjustment in the equity section of the balance sheet.

Debit Prior period adjustment $4,000
Debit Sales commissions expense $2,500
Credit Sales commissions payable $6,500

2. This is a poorly worded question which I can read two ways. Should we be dealing with the total of the 3 adjustments, or only the current year? I assume they would like you to deal with the total to test your ability to segregate balance sheet corrections between the prior year and the current. If correct, you should make an entry to the asset account, inventory, for the net amount of $30,300 (16K + 21K - 6700). Debit or credit? Debit because the number is a net understatement and you need to increase inventory. The credit side would be split between 2008 and prior period. It would result in an increase to the equity section and that makes sense since too much inventory was expensed in prior years.

Debit Inventory $30,300
Debit Cost of goods sold $ 6,700
Credit Prior period adjustment $37,000

3. Two step question: first calculate what straight line would have been had the asset started on that method (100,000 / 10 yr x 3 yr = $30,000). Compare that calculation to the total recorded using double declining of $48,800. The difference is the entry you must make. You will debit accumulated with the change. Secondly, you have to figure out how much of the amount belongs in the current year: 12800 - 10000; the rest is prior period.

Debit Accumulated Depreciation $18,800
Credit Prior period adjustment $16,000
Credit Depreciation expense $ 2,800

4. The narrative tells you that current year income is properly recorded. Second, it says that you don't have to make an entry for current year income tax expense. You only have to deal with income tax on profits not reported in a prior year of $55K ($150K- 95K). Expense or benefit? If you underreported income in a prior year, there is income tax that has not yet been paid, therefore expense in a prior period. You will have a debit to prior period for the tax and a credit to a tax liability account of $22K.

Debit Prior period adjustment $22,000
Income tax payable $22,000

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