During the curse of the Year 2 audit of King Co., the auditor discovered potenti
ID: 2587732 • Letter: D
Question
During the curse of the Year 2 audit of King Co., the auditor discovered potential cutoff and valuation problems that may or may not require adjusting journal entries. For each of the potential cutoff and valuation problems indicated below, complete the required journal entries.
To prepare each entry,
Write in the cells in the account name column and select from the list provided the appropriate account name. If no entry is needed, select “No entry required.” An account may be used once or not at all for each entry.
Enter the corresponding debt or credit amount in the appropriate column.
Round all amounts to the nearest dollar.
1) On January 1, Year 2, the company paid an Insurance premium of $36,000 for the three following years. The entire payment was recognized as Year 2 insurance expense. No Additional entry was made by the company in relation to this transaction. Record the Necessary Year 2 adjustments, if any.
Account Name Debt Credit
2) In their response to the letter of audit inquiry for Year 2, the company’s legal counsel indicated that a former employee has sued the company for $100,000. Management and counsel believe that a material loss probably will occur when pending litigation is resolved, and the reasonable estimate of the amount of range for the potential loss is $20,000 to $80,000. No amount within that range appears to be a better estimate than any other. No accrual was made in the financial statements regarding this suit. Record the necessary Year 2 adjustments, if any.
Account Name Debt Credit
3) On July 1, Year 2, the company received a 5-year loan of $100,000 from the bank. The loan bears a 10% interest that paid annually from July 1, Year 3. Accrued interest payable on the loan were not recorded at year end. Record the necessary Year 2 adjustments, if any.
Account Name Debt Credit
Account Name choices:
Cash
Cost of Goods Sold
Income tax Expense
Interest Expense
Interest Payable
Interest receivable
Inventory
Loss from contingent liability
No entry required
Payroll expense
Prepaid Insurance Expense
Provision for contingent liability
Shareholders’ equity
Trade receivables
Explanation / Answer
1. For correcting the insurance expense account Account Debit Credit Prepaid Insurance Expense 24000 Insurance expense 24000 2. For providing contingent liability for litigation Account Debit Credit Loss from contingent liability 80000 Provision for contingent liability 80000 As the management andcounsel believe that material loss probably will occur, it is being provided. 3. For accruing interest on borrowing Account Debit Credit Interest expense 5000 Interest payable 5000 Interest @10% on $100,000 for six months = $5,000 (From July 1 to Dec.31)
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