Penn Company, a small company following accounting standards for private enterprises, is adjusting and correcting its books at the end of 2011. In reviewing its records, it compiles the following information.
1. Penn has failed to accrue sales commissions payable at the end of each of the last two years, as follows:
Dec. 31, 2010.... $3,500
Dec. 31, 2011 ..... $2,500
2. In reviewing the December 31, 2011 inventory, Penn discovered errors in its inventory-taking procedures that have caused inventories for the last three years to be incorrect, as follows:
Dec. 31, 2009 ....... Understated $16,000
Dec. 31, 2010 ....... Understated $19,000
Dec. 31, 2011 ........ Overstated $ 6,700
Penn has already made an entry that established the incorrect December 31, 2011, inventory amount.
3. In 2011, Penn changed the depreciation method on its office equipment from double-declining-balance to straight-line. The equipment had an original cost of $100,000 when purchased on January 1, 2009. It has a 10-year useful life and no residual value. Depreciation expense recorded prior to 2011 under the double-declining-balance method was $36,000. Penn has already recorded 2011 depreciation expense of $12,800 using the double-declining-balance method.
4. Before 2011, Penn accounted for its income from long-term construction contracts on the completed-contract basis because it was unable to reliably measure the degree of completion or the estimated costs to complete. Early in 2011, Penn’s growth permitted the company to hire an experienced cost accountant and the company changed to the percentage-of-completion basis for financial accounting purposes. The completed-contract method will continue to be used for tax purposes. Income for 2011 has been recorded using the percentage-of-completion method. The following information is available:
(a) Prepare the necessary journal entries at December 31, 2011, to record the above corrections and changes as appropriate. The books are still open for 2011. As Penn has not yet recorded its 2011 income tax expense and payable amounts, tax effects for the current year may be ignored. Penn's income tax rate is 40%.
(b) If there are alternative methods of accounting for any items listed above, explain what the options are and why you chose the particular alternative.

  • CreatedAugust 23, 2015
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