Andy\'s Skateboards, Inc. reported a retained earnings balance of $300,000 at De
ID: 2388220 • Letter: A
Question
Andy's Skateboards, Inc. reported a retained earnings balance of $300,000 at December 31, 2008. In June 2009, Andy's internal audit staff discovered two errors that were made in preparing the 2008 financial statements that are considered material:a. Merchandise costing $50,000 that was on consignment at various consignee locations was mistakenly omitted from the 2008 ending inventory.
b. Equipment purchased in January 2, 2008 for $150,000 was appropriately capitalized and depreciated using straight-line depreciation, a 10-year useful life, and $5,000 salvage value. The capitalized amount included $30,000 for repairs of the equipment which suffered major damage when it was struck by a forklift during installation.
Required:
What amount should Andy's Skateboards report as a prior period adjustment to beginning retained earnings at January 1, 2009? (Ignore taxes)
Give the journal entries that Andy's Skateboards would make in June 2009 to correct the errors made in 2008. Assume that depreciation for 2009 is made as a year-end adjusting entry. (Ignore taxes)
Explanation / Answer
a. Merchandise costing $50,000 that was on consignment at various consignee locations was mistakenly omitted from the 2008 ending inventory. Since it Understaed the Ending Inv in 2008, It overstated the COGS by $50,000 & understated income.So it has to increase Retained Earnngs by $50,000 So Entry is dd Jun2009 Inventory Dr $50,000 Retained earnings Cr $50,000 b. Equipment purchased in January 2, 2008 for $150,000 was appropriately capitalized and depreciated using straight-line depreciation, a 10-year useful life, and $5,000 salvage value. The capitalized amount included $30,000 for repairs of the equipment which suffered major damage when it was struck by a forklift during installation. Dep in 2008 = (150,000-5000)/10 = 14500 Actual Dep should be (120,000-5000)/10 = 11500 So excess Dep in 2008 is 14500-11500 = 3000 So in 2008, reported profit was higher by $3000. So Post correction, Retained earning will reduce by $3000 Journal enrty in 2009 : ddJun2011 Accumulated depreciation Dr 15,000 Retained earnings Cr 3500 Accumulated depreciation Cr 11,500 (Contra entry to correct Accu Dep to $11500) So Total Increase in Retained earning for 2008 = $50,000+$3000 = $53,000 The adjustment to the beginning balance is shown on the current retained earnings statement as follows: Beginning retained earnings balance, as previously reported $300,000 Adjustment: Correction of error in prior period $53,000 Beginning retained earnings balance restated $ 353,000