Problem 22-7 You have been assigned to examine the financial statements of Ayaya

Question

Problem 22-7

You have been assigned to examine the financial statements of Ayayai Company for the year ended December 31, 2017. You discover the following situations.

Cost

Fair Value

Assume the trial balance has been prepared but the books have not been closed for 2017. Assuming all amounts are material, prepare journal entries showing the adjustments that are required. (Ignore income tax considerations.) (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.)

1. Depreciation of $2,900 for 2017 on delivery vehicles was not recorded. 2. The physical inventory count on December 31, 2016, improperly excluded merchandise costing $19,300 that had been temporarily stored in a public warehouse. Ayayai uses a periodic inventory system. 3. A collection of $5,400 on account from a customer received on December 31, 2017, was not recorded until January 2, 2018. 4. In 2017, the company sold for $3,500 fully depreciated equipment that originally cost $23,200. The company credited the proceeds from the sale to the Equipment account. 5. During November 2017, a competitor company filed a patent-infringement suit against Ayayai claiming damages of $229,100. The company’s legal counsel has indicated that an unfavorable verdict is probable and a reasonable estimate of the court’s award to the competitor is $136,900. The company has not reflected or disclosed this situation in the financial statements. 6. Ayayai has a portfolio of trading investments. No entry has been made to adjust to market. Information on cost and fair value is as follows.

Explanation / Answer

Journal Entries :-

S.NO. Particulars Debit Credit

1. Depreciation 2,900

Vehicles 2,900

(Depreciation on vehicles recorded now)

2. Inventory 19,300

Trading A/c 19,300

(recording of inventory not recorded earlier)

3. Cash at Bank 5,400

Debtor 5,400

( Collection from debtor now recorded)

4. Equipment 3,500

Profit on sale of equipment 3,500

(adjustment entry for sale of equipment fully depreciated)

5. No Entry   

6. Loss on investment 1,900

Investment 1,900

(trading investment adjustment to record investment at fair value)

7 .Salaries and wages 3,300

Cash at Bank 3,300

( Salaries and wages payable adjusted at current amounts)

8. Equipment 42,600

Maintenance and Repairs 42,600

(Rectification for equipment purchases)

Depreciation 5,325

Equipment 5,325

(Depreciation on equipment 42,600/8)

9. Insurance prepaid 6,600

Insurance 6,600

(Insurance amount prepaid adjusted for one and half year-13,200/3*1.5)

10. Amortization 9,440

Trademark 9,400

(Amortization of trademark 47,200/10*2)

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