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Adjusting Entries.

1. A company borrowed $100,000 on December 1 by signing a six-month note that specifies interest at an annual
percentage rate (APR) of 12%. No interest or principal payment is due until the note matures on May 31. The
company prepares financial statements at the end of each calendar month.
2. Intangibles R Us bought a patent for $600,000 on January 1, 2008, at which time the patent had an estimated
useful life of 10 years. On February 15, 2011, it was determined that the patent's useful life would expire at
the end of 2011. How much would Intangibles record as amortization expense for this patent for the year
ending December 31, 2011?
3. In 2011, Maggie Corporation appropriately changed its inventory valuation method to FIFO from LIFO for
both financial statement and income tax purposes. The change will result in a $140,000 increase in the
beginning inventory on January 1, 2011. Assume a 30 percent tax rate. The effect of this accounting change
will be to change prior-year net income and/or retained earnings amounts by a cumulative total of a
Effect of an error on Net Income and Retained Earning for Multiple Years.
1. On 2014, a company discovered that sales had an overstatement of P34,000. Show the effects of the error from
2013-2015.
2. Last year (2012), the accountant noticed that an understatement of the ending merchandise inventory of
P15,000 occurred. Illustrate the effects of error both on the net income and retained earnings.
3. Nelson Corporation reports on a calendar-year basis. Its 2010 and 2011 financial statements contained the
following errors:
2010 2011
Over(Under)statement of ending inventory $(10,000) $ 5,000
Depreciation understatement 4,000 6,000
Failure to accrue salaries at year-end 8,000 12,000
As a result of the above errors, 2011 income would be overstated by

4. Empire Companys December 31 year-end financial statements contained the following errors:
December 31, 2010 December 31, 2011
Ending inventory $4,000 understated $3,600overstated
Depreciation expense 800 understated
An insurance premium of $3,600 was prepaid in 2010 equally covering the years 2010, 2011, and 2012. The
entire amount was charged to expense in 2010. In addition, on December 31, 2011, fully depreciated
machinery was sold for $6,400 cash, but the sale was not recorded until 2012. There were no other errors
made, and no corrections have been made for any of the errors. Ignore income tax considerations. What is the
total effect of the errors on Empires 2011 net income?

5. On January 2, year 4, a company paid P12,00, three-year insurance premium on company property and debited
insurance expense, but made no further journal entry regarding the transaction. The error was never
discovered. Discuss the effect of the error on both on the net income and retained earnings from year 4, 5, 6.
6. Dimmu Company purchased a machine on January 1, 2010, at a cost of $120,000. An additional $50,000 was
spent for installation, but this amount was charged erroneously to Repairs Expense and not discovered until
2012. The machine has a useful life of five years and a salvage value of $20,000. As a result of the error
7. A bank lent $100,000 to a customer on December 1 that required the customer to pay an annual percentage
rate (APR) of 12% on the amount of the loan. The loan is due in six months and no payment of interest or
principal is to be made until the note is due on May 31. The bank prepares monthly financial statements at the
end of each calendar month.
8. On December 1, your company paid its insurance agent $2,400 for the annual insurance premium covering
the twelve-month period beginning on December 1. The $2,400 payment was recorded on December 1 with a
debit to the current asset Prepaid Insurance and a credit to the current asset Cash. Your company prepares
monthly financial statements at the end of each calendar month.
9. On December 1, your company paid its insurance agent $2,400 for the annual insurance premium covering
the twelve-month period beginning on December 1. The $2,400 payment was recorded on December 1 with a
debit to the income statement account Insurance Expense and a credit to the current asset Cash. Your company
prepares monthly financial statements at the end of each calendar month.
10. On December 1, XYZ Insurance Co. received $2,400 from your company for the annual insurance premium
covering the twelve-month period beginning on December 1. XYZ Insurance Co. recorded the $2,400 receipt
as of December 1 with a debit to the current asset Cash and a credit to the current liabilityUnearned Revenues.
XYZ Insurance Co. prepares monthly financial statements at the end of each calendar month.
11. On December 1, your company began operations. On December 3 it purchased $1,500 of supplies and
recorded the transaction with a debit to the current asset Supplies and a credit to the current liabilityAccounts
Payable. Your company prepares monthly financial statements at the end of each calendar month. At the end
of the day on December 31, your company estimated that $700 of the supplies were still on hand in the supply
room.
12. On December 1, your company began operations. On December 4 it purchased $1,500 of supplies and
recorded the transaction with a debit to the income statement account Supplies Expense and a credit to the
current liability Accounts Payable. Your company prepares monthly financial statements at the end of each
calendar month. At the end of the day on December 31, your company estimated that $700 of the supplies
were still on hand in the supply room.
13. The Potter Corporation purchased a machine on January 1, 2010. The machine cost $46,000, with an estimated
salvage value of $2,000 and an estimated useful life of 10 years. As a result of technological improvements, a
revision of the machine's useful life and estimated salvage value was made. On January 1, 2011, the equipment
was estimated to last through 2012, with an estimated value at the end of 2012 of $500. Potter uses the straight-
line depreciation method.
14. On January 1, 2011, Amoeba Company changed its method of accounting for bad debts from the direct write-
off method to the allowance method. The company's controller determined that an allowance of $30,000
should be established on that date.
15. In reviewing the books of Pelican Company early in 2012, the auditor discovered certain items that had
occurred during 2010 and 2011. No errors were corrected during 2010. The errors are summarized below:
a. Beginning merchandise inventory (January 1, 2010) was understated by $8,640.
b. Merchandise costing $2,400 was sold for $4,000 to S. Cain on December 30, 2010, but the sale was recorded
in 2011. The merchandise was shipped F.O.B. shipping point and was not included in ending inventory.
Pelican uses a periodic inventory system.
c. A two-year fire insurance policy was purchased on May 1, 2010, for $5,760. The entire amount was debited
to Prepaid Insurance. No adjusting entry was made in 2010 or 2011.
d. A one-year note receivable of $9,600 was held by Pelican beginning October 1, 2010. Payment of the 10
percent note and accrued interest was received upon maturity. The entry on October 1, 2011, was a debit to
Cash for $10,560, a credit to Note Receivable for $9,600, and a credit to Interest Revenue for $960. No
adjusting entry was made on December 31, 2010.
e. Equipment with a ten-year life was purchased on January 1, 2010, for $39,200. No depreciation expense
was recorded during 2010 or 2011. Assume that the equipment has no salvage value and that Pelican uses the
straight-line method for recording depreciation.

Prepare journal entries, if needed, to correct each of these independent situations. Assume that the nominal
(temporary) accounts for 2011 have not yet been closed into the Income Summary account. A comparative set
of financial statements will not be issued for 2010 and 2011.

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