Exercise 5: You have been engaged to review the financial statements of Water Sy
ID: 2419035 • Letter: E
Question
Exercise 5: You have been engaged to review the financial statements of Water Sync Inc. In the course of your investigation you find a number of irregularities during the current year.
1. Insurance for a 6-month period purchased on October 1 of this year was charged to prepaid insurance
in the amount of $5,000.
2. Year-end estimate of bonuses totaled $61,000 and was not recorded because the payment would
not be made until next year.
3. Warranty expense averages 5% on current year sales of $5,000,000. Warranty expense is automatically debited for 5% of each sale. During the current year, the company also paid $225,000 in
warranty related claims. The bookkeeper thought that the payments were an expense and debited
warranty expense.
4. Office rent is paid quarterly in advance. The first quarter rent for next year ($25,000) was paid in
December and rent expense was debited.
Instructions
Prepare the necessary correcting entries, assuming that Sync Inc. uses a calendar-year basis.
Explanation / Answer
DR CR Inurance Expense 5000/6 * 3 months 2500 Prepaid Insurance 2500 Bonus 61000 Bonus Payable 61000 Accrued warranty liability 225000 Warranty expense 225000 Rent Advance 25000 Rent Expense 25000