Exercise 4: The first audit of the books of Nuvo Corp. was made for the year end

Question

Exercise 4: The first audit of the books of Nuvo Corp. was made for the year ended December 31, 2014. In examining the books, the auditor found that certain items had been overlooked or incorrectly handled in the last 3 years. These items are:

1. Nuvo Corp. amortized goodwill of $400,000 recorded from an acquisition in 2013 over 40 years.

2. The company did not record the estimated warranty accrual of $66,000 at the end of 2014.

3. A patent infringement lawsuit filed against the company in 2012 was settled late in 2014. It was determined that the company owed $100,000. The company recorded a $50,000 liability in 2013 based on its assessment at the time. The payment was charged against the accrual in 2014

. 4. In 2013, the company purchased equipment for $220,000 (salvage value of $20,000) that had a useful life of 5 years. The bookkeeper deducted the salvage value from the cost before applying the double-declining balance method in each year.

5. In 2014, the company wrote off $100,000 of accounts receivable believed to be uncollectible; this loss was charged directly to Retained Earnings.

Instructions

Prepare the journal entries necessary in 2014 to correct the books, assuming that the books have not been closed. Disregard effects of corrections on income tax.

Explanation / Answer

Observation Account Titles Debit Credit $ $ 1. Amortization expense - goodwill 30,000 Goodwill 30,000 2. Product warranty expense 66,000 Estimated warranty liability 66,000 3. Loss on litigation 50,000 Litigation liability 50,000 Cash 100,000 4. Retained earnings 8,000 Accumulated depreciation- equipment 8,000 5. Allowance for doubtful debts 100,000 Retained earnings 100,000

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