Question

Penn Company is in the process of adjusting and correcting its books at the end of 2017. 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, 2016 \(3,500 December 31, 2017 \)2,500

2. In reviewing the December 31, 2017, 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, 2015 Understated \(16,000 December 31, 2016 Understated \)19,000 December 31, 2017 Overstated \( 6,700 Penn has already made an entry that established the incorrect December 31, 2017, inventory amount.

3. At December 31, 2017, Penn decided to change the depreciation method on its office equipment from double-decliningbalance to straight-line. The equipment had an original cost of \)100,000 when purchased on January 1, 2015. It has a 10- year useful life and no salvage value. Depreciation expense recorded prior to 2017 under the double-declining-balance method was \(36,000. Penn has already recorded 2017 depreciation expense of \)12,800 using the double-declining-balance method. 4. Before 2017, Penn accounted for its income from long-term construction contracts on the completed-contract basis. Early in 2017, Penn changed to the percentage-of-completion basis for accounting purposes. It continues to use the completedcontract method for tax purposes. Income for 2017 has been recorded using the percentage-of-completion method. The following information is available.

Pretax Income

Percentage-of-Completion Completed-Contract

Prior to 2017 \(150,000 \)105,000

2017 60,000 20,000

Instructions

Prepare the journal entries necessary at December 31, 2017, to record the above corrections and changes. The books are still open for 2017. The income tax rate is 40%. Penn has not yet recorded its 2017 income tax expense and payable amounts so current-year tax effects may be ignored. Prior-year tax effects must be considered in item 4.

Short answer

All the journal entries for the correction of the errors are recorded in steps.

Step-by-step solution

Journal entry for Part 1

Date	Particulars	Debit ($)	Credit ($)
	Retained Earnings	3,500
	Sales Commissions payable		2,500
	Sales Commissions Expense		1,000
	(Being correction entry recorded)

Journal entry for Part 2

Date	Particulars	Debit ($)	Credit ($)
	Cost of goods sold	25,700
	Retained Earnings		19,000
	Inventory		6,700
	(Being correction entry recorded)

Journal entry for Part 3

Date	Particulars	Debit ($)	Credit ($)
	Accumulated Depreciation	4,800
	Depreciation Expense		4,800
	(Being correction entry recorded)

Journal entry for Part 4

Date	Particulars	Debit ($)	Credit ($)
	Construction in Process	45,000
	Deferred Tax liability		18,000
	Retained Earnings		27,000
	(Being correction entry recorded)