Part II: Por each of the following audit findings, provide the appropriate journ
ID: 2522294 • Letter: P
Question
Part II: Por each of the following audit findings, provide the appropriate journal entry to adjust or correct the accounting records as necessary. If no journal entry is needed, then explain the reasoning why Your accounting firm was engaged to audit ABC company. Year 1 was ABC Company' s first year of operations. Management decided to make the move to a public offering of its stock in Year 2. Prior to Year 2, ABC Company had no need for an audit of its financial statements because the company was privately funded. Now that it is a publicly held company, ABC Company muet comply with SEc reporting requirements necessitating an audit of the financial statements. It is now January 20th, and you are performing your final audit tests. ABC Company has NOT performed the final closing entries for Year 2 s0 that any audit adjustments may be made. Ignore all income tax amounta. ecutoff tests for liabilities at the end of Year 2, you noted During th that the payroll for the two weeks of December 16-31 was recorded on January 15 when it was paid. Gross salaries were $7,000. Withholdinge are $1,o health insurance. Unemployment taxes were acerued as of December 31. 1. o0 for federal income taxes, $500 for FICA taxes, ana $200 for Inspection of the patent account shows a recorded value of $30, 800. Analysis of the legal documentation indicates that the filing fee with the federal government mana Ju 2. on July 1, Year 1 was $21,000. Inquiry with gement revealed that the patent is expected to last 15 years. On ly 1, Year 2, ABC Company successfully defended its patent incurring legal costs of $11,900Explanation / Answer
ABC COMPANY Adjusting Journal Entries for the year 2. Ref Account Title Debit Credit 1a Salaries and Wages Expense 7000 Employee Federal IncomeTax Payable 1000 FICA taxes payable 500 Salaries and Wages Payable 5500 1b Payroll Taxes 500 FICA taxes payable 500 As the unemployments taxes have already been accrued on Dec.31, only the employer's FICA taxes are accounted in 1b. 2. This requires entry for the amortization of the legal costs of successfully defending its patent . ( 11,900 / 15)/2 Ref Account Title Debit Credit 2 Amortization expense 397 Patent Account 397 3. Since the accounting for allowance for doubtful accoutns is based on sales, $9,000 shall be provided at the end of the year2. at the rate of 1% of $900,000 of credit sales. Ref Account Title Debit Credit 3 Bad debt expense 9000 Allownce for doubtful accounts 9000 4. This needs to be discussed with the management and if accepted, needs to be writen off. 5. It needs to be checked whther the issue was priced at the market value. If it is so then the following entry needs to be recorded for the difference between the market value and par value. Ref Account Title Debit Credit 5 Common Stock 75000 Additional paid-in-capital - Common stock 75000 6. Loss on account of inestment is to be recorded as unrealized loss, as the same is only a loss due to reduction in market value and not actual loss incurred. As the invntory is to be valued, at lower of cost or market value, the loss due to lower market value will be absorbed in the cost of goods sold and will not be separately reported. Ref Account Title Debit Credit 6 Unrealizaed loss on available for sale securities 75000 Cost of goods sold 30000 Loss debt securities vailable for sale 75000 Loss on long-term inventory contract 30000 7. Depreciation needs to be provided for 3 months of Year 1 and full year in year 2. Ref Account Title Debit Credit 6 Retained Earnings 2375 Depreciation Expense 9500 Accumulated Deprecation 11875 Cost 100000 Salvage value 5000 Depreciable value 95000 Estimated Life 10 years Annual Depreciation (100,000 - 5,000)/10 9,500 Depreciation for 3 months =9,500 / 4 2375 Depreciation for Year 2 9500 Depreciation for year 1 shalll be charged to retained earnings.