Problem 22-3 Pretax Income Percentage-of-Completion Completed-Contract Problem 2
ID: 2481932 • Letter: P
Question
Problem 22-3
Pretax Income
Percentage-of-Completion
Completed-Contract
Problem 22-3
Penn Company is in the process of adjusting and correcting its books at the end of 2014. In reviewing its records, the following information is compiled.1. Penn has failed to accrue sales commissions payable at the end of each of the last 2 years, as follows. December 31, 2013 $3,900 December 31, 2014 $2,900 2. In reviewing the December 31, 2014, inventory, Penn discovered errors in its inventory-taking procedures that have caused inventories for the last 3 years to be incorrect, as follows. December 31, 2012 Understated $16,500 December 31, 2013 Understated $21,800 December 31, 2014 Overstated $6,700
Penn has already made an entry that established the incorrect December 31, 2014, inventory amount.
3. At December 31, 2014, Penn decided to change the depreciation method on its office equipment from double-declining-balance to straight-line. The equipment had an original cost of $118,000 when purchased on January 1, 2012. It has a 10-year useful life and no salvage value. Depreciation expense recorded prior to 2014 under the double-declining-balance method was $38,000. Penn has already recorded 2014 depreciation expense of $12,800 using the double-declining-balance method. 4. Before 2014, Penn accounted for its income from long-term construction contracts on the completed-contract basis. Early in 2014, Penn changed to the percentage-of-completion basis for accounting purposes. It continues to use the completed-contract method for tax purposes. Income for 2014 has been recorded using the percentage-of-completion method. The following information is available.
Pretax Income
Percentage-of-Completion
Completed-Contract
Prior to 2014 $167,800 $111,000 2014 56,400 24,900Prepare the journal entries necessary at December 31, 2014, to record the above corrections and changes. The books are still open for 2014. The income tax rate is 30%. Penn has not yet recorded its 2014 income tax expense and payable amounts so current-year tax effects may be ignored. Prior-year tax effects must be considered in item 4. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)
Explanation / Answer
1. Retained earnings............................................................. 3900
Sales commission Payable....................................... 2900
Sales commission Expense...................................... 1000
2. Cost of goods sold (21800 + 6700)................................. 28500
Retained Earnings.................................................... 21800
Inventory................................................................. 6700
2012
2013
2014
Beginning inventory
16000
21800
Ending inventory
-16000
-21800
6700
Overstatement/understatement
-16000
-5800
28500
of net income
3. Accumulated Depreciation—Equipment.......................... 4,800
Depreciation Expense.............................................. 4,800
Workings:
Equipment cost................................................. 118000
Depreciation before 2014 ……………………………38000
Book value..................................................... 80000
Depreciation already recorded.............................. 12800
Depreciation to be applied (80,000/8) 10000
Difference............................................................. 2800
4. Work in Process ………………….(167800-111000) 56800
Deferred Tax Liability……………....... (56800*0.3) …………… 17040
Retained Earnings ……………………………………… ………. 39760
2012
2013
2014
Beginning inventory
16000
21800
Ending inventory
-16000
-21800
6700
Overstatement/understatement
-16000
-5800
28500
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