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During the year-end audit of Cressman Corporation’s financial statements for 201

ID: 2486806 • Letter: D

Question

During the year-end audit of Cressman Corporation’s financial statements for 2016, you discover the following items:

Required:

Prepare the necessary journal entries at December 31, 2016 to record corrections

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PAGE 1

GENERAL JOURNAL

Score: 91/101

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Adjusting Entries

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1. Cressman capitalized $57,000 to the Patent account at the beginning of 2015 for the cost of a patent. This amount included $50,000 of R&D costs. The patent was amortized over a 20-year life in 2015 and 2016. 2. At the beginning of 2015, Cressman paid its lawyers $8,000 to successfully defend a patent infringement suit regarding the patent in Item 1. Cressman debited this cost to Legal Fees Expense. 3. At the beginning of 2016, Cressman purchased a patent for $30,000 from Baylor Company to prevent potential competition. It recorded the cost in the Patent account and amortized this cost over the remaining legal life of the patent obtained in Item 1 (19 years). However, Cressman agreed to a suggestion by the auditors that the life of the original patent obtained in Item 1 was protected for only 7 more years as of the beginning of 2016.

Explanation / Answer

Journal Entries S.no. Particulars Debit Credit 1 Income summary 7000 Patent 7000 ( Rectification = 57,000 - 50,000 = 7,000 ) 1 Accumulated depreciation- Patent 700 Depreciation 700 (Being Depreciation more claimed now rectified) ( Rectification 2015 = 7,000 / 20 = 350 ) ( Rectification 2016 = 7,000 / 20 = 350 ) 2 Patent 8,000 Legal Expenses 8,000 2 Depreciation 800 Accumulated Depreciation - Patent 800 (Being depreciation less claimed now claimed) (Rectification for 2015 = 8,000 / 20 = 400) (Rectification for 2016 = 8,000 / 20 = 400) 3 Depreciation 2707 Accumulated Depreciation - Patent 2707 ( Being Depreciation less claimed now claimed) Wrong calculation = 30,000 / 19 = 1,579 Correct Calculation = 30,000 / 7 = 4,286 Less claimed = 4,286 - 1,579 = 2,707

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