Chapter 10, Problem 53EP

a.

To determine

Make adjusting entries for assets for the year ended December31, 2017.

Explanation of Solution

Assets:

Assets are defined as resources owned by a company that are economically viable and is capable of generating profits in the future.

1.

Adjustment entry for machinery wrongly charged to patents is given below:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Machinery		17,000
	Patents			17,000
	(To rectify theimprovement to machinery wrongly charged to patents.)

Table (1)

• Machinery is an asset and it is increased by $17,000. Therefore, machinery account is debited with $17,000.
• A patent is an asset and it is decreased by $17,000. Therefore, patent account is credited with $17,000.

Adjustment entry for amortization of patents is given below:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Cost of Goods Sold		4,0001
	Patents			4,0001
	(To record amortization of patents.)

Table (2)

• Cost of goods sold is an expense and it is increased by $4,000. Therefore, cost of goods sold account is debited with $4,000.
• A patent is an asset and it is decreased by $4,000. Therefore, patent account is credited with $4,000.

2.

Adjustment entry for unearned revenue is given below:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Licensing Agreement No. 2		1,000
	Revenue Received in Advance			1,000
	(To record revenue earned in advance.)

Table (3)

• Licensing agreement is an asset and it is increased by $1,000. Therefore, licensing agreement no-2 is debited with $1,000.
• Revenue received in advance is an income and it is increased by $1,000. Therefore, revenue received in advance account is credited with $1,000.

3.

Adjustment entry for losscaused due to flood is given below:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Retained Earnings		30,0002
	Licensing Agreement No-1			30,0002
	(To record the loss.)

Table (4)

• Retained Earnings is a liability and it is decreased by $30,000. Therefore, retained earnings account is debited with $30,000.
• Licensing agreement no.1 is an asset and it is decreased by $30,000. Therefore, licensing agreement no.1 account is credited with $30,000.

4.

Adjustment entry for amortization of licensing agreement no-2is given below:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Cost of Goods Sold		5,0003
	Licensing Agreement No-2			5,0003
	(To record the amortization of licensing agreement no-2.)

Table (5)

• Cost of goods sold is an expense and it is increased by $5,000. Therefore, cost of goods sold account is debited with $5,000.
• Licensing agreement no-2 is an asset and it is decreased by $5,000. Therefore, licensing agreement no-2 account is credited with $5,000.

5.

Adjustment entry for amount wrongly included in goodwillis given below:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Retained Earnings		24,000
	Goodwill			24,000
	(To rectify the amount wrongly charged to goodwill.)

Table (6)

• Retained earnings are liability and it is reduced by $24,000. Therefore, retained earnings account is debited with $24,000.
• Goodwill is an asset and it is reduced by $24,000. Therefore, goodwill account is credited with $24,000.

6.

Adjustment entry for amortization of leasehold improvement is given below:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Amortization Expense-Current Year		1,500
	Amortization Expense-Error Correction		1,500
	Leasehold Improvement	`		3,000
	(To record current and past years amortization amounts.)

Table (7)

• Amortization is an expense and it is reduced by $1,500 each for current year and past year. Therefore, amortization account is debited with $3,000.
• Leasehold improvement is an asset and it is reduced by $3,000. Therefore, leasehold improvement account is credited with $3,000.

Adjustment entry for equipment and taxes is given below:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Equipment		8,500
	Accounts Receivable-Non-Trade		2,500
	Leasehold Improvement	`		11,000
	(To record equipment and accounts receivable correctly.)

Table (8)

• Equipment and accounts receivable (non trade) is an asset and it is increased by $8,500 and $2,500 each. Therefore, equipment with $8,500 and accounts receivable by $2,500 is debited.
• Leasehold improvement is an asset and it is reduced by $11,000. Therefore, leasehold improvement account is credited with $11,000.

7.

Adjustment entry for amount wrongly capitalized is given below:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Retained Earnings		29,000
	Organizational Expenses			29,000
	(To write off the organizational expenses wrongly capitalized.)

Table (9)

• Retained earnings are liability and it is reduced by $29,000. Therefore, retained earnings account is debited with $29,000.
• Organizational expense is an expense and it is increased by $29,000. Therefore, organizational expenses account is credited with $29,000.

Working Note:

1. Calculation of amortized value:

$\begin{array}{c}\text{Amortised}\text{Value}=\frac{\text{Value}\text{of}\text{Patents}}{\text{Number}\text{of}\text{Years}}\\ =\frac{\$68,000}{17\text{years}}\\ =\$4,000\end{array}$

2. Calculation of reduction in expected revenue:

$\begin{array}{c}\text{Reduction}\text{in}\text{Expected}\text{Revenue}=60\%\times \text{Licensing}\text{Agreement}\text{No}\text{.1}\\ =\frac{60}{100}\times \$50,000\end{array}$

3. Calculation of amortized value:

$\begin{array}{c}\text{Amortised}\text{Value}=\frac{\text{Value}\text{of}\text{Patents}}{\text{Number}\text{of}\text{Years}}\\ =\frac{\$50,000}{10\text{years}}\\ =\$5,000\end{array}$

b.

To determine

Identify the substantive audit procedures performed to test the transactions.

Explanation of Solution

Audit Procedures:

A specific procedure undertaken by an auditor to procure evidence in a particular audit engagement is called audit procedure.

The substantive audit procedures performed to assess the transactions are as follows:

• To test the transaction, procedures should be performed includes assessing the patents agreements and credentials.
• To test the transaction, procedures performed should include verification of agreement and matching the amount credited in bank accounts.
• To test the transaction, insurance agreement should be vouched and evidences should be collected with respect to damage caused.
• To test the transaction, the amortization values should be recalculated.
• To test the transaction, procedures should include accounting treatment of goodwill and its calculation.
• To test the transaction, it should include examination of documents that are related to equipment and real estate taxes. It should also include recalculations of amortization.
• To test the transaction, procedures performed should include assessment of organizational expenses voucher and also checking the retained earnings account.