Question

The audit senior has just approached you and asked you to review a list of transactions he thinks are potential errors from the previous period. Review the following list of transactions and record the correcting journal entries, should one be necessary:
Interest on notes payable totaling $25,000 was never recorded.
200 shares of trading securities were reported at a value of $10 per share when the market value was $14 a share at year end.
The salvage value of $1,000 for equipment purchased 3 years ago for $15,000 and a 10-year useful life was not included in the straight-line depreciation calculation.
$2,500 worth of inventory shipped to Hogg Enterprises on December 31, 2007, using free on board (F.O.B.) shipping point, was not recorded until January 3, 2008, when it arrived.
A truck was purchased on July 1, 2006, and was accidentally recorded as Machinery. The original cost of the truck was $20,000. It was estimated that the salvage value would be $2,000 and the useful life would be five years. Straight-line depreciation was used, and Hogg separated depreciation into individual categories instead of recording it in one generalized depreciation account.
In addition to the errors above, Hogg wants to change depreciation methods for its equipment. Listed below is the equipment value at historical cost and the current amount of accumulated depreciation:
Production Equipment ........$300,000
Less: Accumulated Depreciation ....$100,000
Book Value of Equipment ....... $200,000

The equipment was purchased 5 years ago and is expected to have a 15-year useful life and zero salvage value. Currently, the company is using the straight-line method and wants to change to the double-declining method.
Compute the effect of this change on the financial statements. Analyze the errors and prepare correcting journal entries. Also, evaluate the proposed change in the given accounting principle and compute the impact on the company’s financial statements. Update the log of issues to include this week’s topics.
1) Interest on notes payable totaling $25,000 was never recorded.
2) 200 shares of trading securities were reported at a value of $10 per share when the market value was $14 a share at year end.
3) The salvage value of $1,000 for equipment purchased 3 years ago for $15,000 and a 10 year useful life was not included in the straight-line depreciation calculation.
4) $2,500 worth of inventory shipped to Hogg Enterprises on December 31, 2007, using free on board (F.O.B.) shipping point, was not recorded until January 3, 2008, when it arrived.
5) For making correction following journal entry will be passed and depreciation entry has to be recorded. Depreciation has to be recorded for 6 months as the asset has been purchased on 1st July
6) Depreciation has been calculated as follows;
(100% /10) *2 = 20%
Depreciation on $200,000 *20% = $40,000



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  • CreatedJuly 26, 2013
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