Analysis of Errors: Correcting Entries and Correct Pretax Income Travis Inc. has just completed its financial statements for the reporting year ended December 31 of Year 5. Pretax income is $800.000. The accounts have not been closed for December 31 of Year 5. Further consideration and review of the records revealed the following items related to the Year 5 statements. 1. On January 1 of Year 1, a machine was acquired that cost $50,000. The estimated useful life was 10 years, and the residual value was $10,000. At the time of acquisition, the full cost of the machine was incorrectly debited to the land account. The company uses straight-line depreciation. 2. On January 1 of Year 3, a long-term investment of $90,000 was made by purchasing a $100,000, 8% bond of FDC Corporation. The investment account was debited for $90,000. Each year, starting on December 31 of Year 3, the company has recognized and reported investment revenue on these bonds of $8 The bonds mature in 10 years from the date of purchase. Assume that any amortization would follow the straight-line method and that Travis intends to hold the bonds to maturity. 3. The Year 4 ending inventory was overstated by $35,000 (periodic inventory system). 4. An $55.000 credit purchase of merchandise occurred on December 18 of Year 4. Because the merchandise was held on December 31 of Year 4, it was included in the Year 4 ending inventory. The purchase was recorded on January 18 of Year 5, when the invoice was paid (periodic inventory system). Required a. Prepare correcting entries that should be made on December 31 of Year 5 for each of the four errors identified. Ignore income tax effects. Ref. 2. 3. To correct error and record current year depreciation To correct error To correct error Account To correct error b. Compute the correct pretax income for Year 5. Dr. Cr.
Analysis of Errors: Correcting Entries and Correct Pretax Income Travis Inc. has just completed its financial statements for the reporting year ended December 31 of Year 5. Pretax income is $800.000. The accounts have not been closed for December 31 of Year 5. Further consideration and review of the records revealed the following items related to the Year 5 statements. 1. On January 1 of Year 1, a machine was acquired that cost $50,000. The estimated useful life was 10 years, and the residual value was $10,000. At the time of acquisition, the full cost of the machine was incorrectly debited to the land account. The company uses straight-line depreciation. 2. On January 1 of Year 3, a long-term investment of $90,000 was made by purchasing a $100,000, 8% bond of FDC Corporation. The investment account was debited for $90,000. Each year, starting on December 31 of Year 3, the company has recognized and reported investment revenue on these bonds of $8 The bonds mature in 10 years from the date of purchase. Assume that any amortization would follow the straight-line method and that Travis intends to hold the bonds to maturity. 3. The Year 4 ending inventory was overstated by $35,000 (periodic inventory system). 4. An $55.000 credit purchase of merchandise occurred on December 18 of Year 4. Because the merchandise was held on December 31 of Year 4, it was included in the Year 4 ending inventory. The purchase was recorded on January 18 of Year 5, when the invoice was paid (periodic inventory system). Required a. Prepare correcting entries that should be made on December 31 of Year 5 for each of the four errors identified. Ignore income tax effects. Ref. 2. 3. To correct error and record current year depreciation To correct error To correct error Account To correct error b. Compute the correct pretax income for Year 5. Dr. Cr.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Related questions
Question
Transcribed Image Text:Analysis of Errors: Correcting Entries and Correct Pretax Income
Travis Inc. has just completed its financial statements for the reporting year ended December 31 of Year 5. Pretax income is $800,000. The accounts have not been closed for December 31 of Year 5. Further consideration and review of the records revealed the following items related to the Year 5 statements.
1. On January 1 of Year 1, a machine was acquired that cost $50,000. The estimated useful life was 10 years, and the residual value was $10,000. At the time of acquisition, the full cost of the machine was incorrectly debited to the land account. The company uses straight-line depreciation.
2. On January 1 of Year 3, a long-term investment of $90,000 was made by purchasing a $100,000, 8% bond of FDC Corporation. The investment account was debited for $90,000. Each year, starting on December 31 of Year 3, the company has recognized and reported investment revenue on these bonds of $8,000.
The bonds mature in 10 years from the date of purchase. Assume that any amortization would follow the straight-line method and that Travis intends to hold the bonds to maturity.
3. The Year 4 ending inventory was overstated by $35,000 (periodic inventory system).
4. An $55,000 credit purchase of merchandise occurred on December 18 of Year 4. Because the merchandise was held on December 31 of Year 4, it was included in the Year 4 ending inventory. The purchase was recorded on January 18 of Year 5, when the invoice was paid (periodic inventory system).
Required
a. Prepare correcting entries that should be made on December 31 of Year 5 for each of the four errors identified. Ignore income tax effects.
Ref.
3.
4
To correct error and record current year depreciation.
To correct error.
To correct error.
Account
To correct error.
b. Compute the correct pretax income for Year 5.
$
Dr.
Cr.
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 4 steps with 1 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.Recommended textbooks for you
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis…
Accounting
ISBN:
9780134475585
Author:
Srikant M. Datar, Madhav V. Rajan
Publisher:
PEARSON
Intermediate Accounting
Accounting
ISBN:
9781259722660
Author:
J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:
McGraw-Hill Education
Financial and Managerial Accounting
Accounting
ISBN:
9781259726705
Author:
John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:
McGraw-Hill Education