In reviewing the accounts in 2021 (after the books for the prior year had been closed), you
Question:
In reviewing the accounts in 2021 (after the books for the prior year had been closed), you find the following issues:
1. Ending inventory had been overstated for the past 3 years: 2018 overstated $7,000; 2019 overstated $8,500; and 2020 overstated $4,000.
2. The company's advertising agent agreed to provide services in the year and collect payment in January of the following year. The company failed to accrue advertising expense at the end of each of the past 3 years and instead recorded advertising expense when cash was paid in January. Consequently, the firm's 2018 advertising expense was understated $1,100; 2019 was understated 2,000; and 2020 was understated $1,200.
3. The company has decided to switch from the direct write-off method for accounting for bad debts to the percentage-of-receivables approach. Bad debt expense of $10,600 was recognized in 2019 and $19,000 in 2020 based on the direct write-off method. The controller estimates that $21,800 in bad debts will be written off in 2021: $3,800 applicable to 2019 sales and $18,000 to 2020 sales.
4. A truck was purchased on January 1, 2018 for $98,000 cash, with an $8,000 estimated residual value and a six-year life. The company debited an expense account for the entire cost of the asset and uses straight-line depreciation for all vehicles.
Instructions:
You discover these issues in March 2021 after the books had been closed for 2020.
Prepare the journal entries to bring the books to their correct balance. Assume the company's income tax rate is 25%.
