The first audit of the books of Gomez Limited was recently carried out for the year ended December 31, 2011. Gomez follows IFRS. In examining the books, the auditor found that certain items had been overlooked or might have been incorrectly handled in the past:
1. At the beginning of 2009, the company purchased a machine for $450,000 (residual value of $45,000) that had a useful life of six years. The bookkeeper used straight-line depreciation, but failed to deduct the residual value in calculating the depreciation base for the three years.
2. At the end of 2010, the company accrued sales salaries of $36,000 in excess of the correct amount.
3. A tax lawsuit that involved the year 2009 was settled late in 2011. It was determined that the company owed an additional $73,000 in taxes related to 2009. The company did not record a liability in 2009 or 2010, because the possibility of losing was considered remote. The company charged the $73,000 to retained earnings in 2011 as a correction of a prior year’s error.
4. Gomez purchased another company early in 2007 and recorded goodwill of $450,000. Gomez amortized $22,500 of goodwill in 2007, and $45,000 in each subsequent year.
5. In 2011, the company changed its basis of inventory costing from FIFO to weighted average cost. The change’s cumulative effect was to decrease net income of prior years by $39,000. The company debited this cumulative effect to Retained Earnings. The average cost method was used in calculating income for 2011.
6. In 2011, the company wrote off $87,000 of inventory that it discovered, in 2011, had been stolen from one of its warehouses in 2010. This loss was charged to a loss account in 2011.
Instructions
(a) Prepare the journal entries in 2011 to correct the books where necessary, assuming that the 2011 books have not been closed. Assume that the change from FIFO to weighted average cost can be justified as resulting in more relevant financial information. Disregard the effects of corrections on income tax.
(b) Identify the type of change for each of the six items.
(c) Redo part (a) but include the effects of income tax, assuming the company has a tax rate of 25%