Question

(Error Correction Entries) The first audit of the books of Bruce Gingrich Company was made for the year ended December 31, 2018. In examining the books, the auditor found that certain items had been overlooked or incorrectly handled in the last 3 years.

These items are:

1. At the beginning of 2016, the company purchased a machine for \(510,000 (salvage value of \)51,000) that had a useful life of 6 years. The bookkeeper used straight-line depreciation but failed to deduct the salvage value in computing the depreciation base for the 3 years.

2. At the end of 2017, the company failed to accrue sales salaries of \(45,000.

3. A tax lawsuit that involved the year 2016 was settled late in 2018. It was determined that the company owed an additional \)85,000 in taxes related to 2016. The company did not record a liability in 2016 or 2017 because the possibility of loss was considered remote, and charged the \(85,000 to a loss account in 2018.

4. Gingrich Company purchased a copyright from another company early in 2016 for \)45,000. Gingrich had not amortized the copyright because its value had not diminished. The copyright has a useful life at purchase of 20 years.

5. In 2018, the company wrote off $87,000 of inventory considered to be obsolete; this loss was charged directly to Retained Earnings. Instructions Prepare the journal entries necessary in 2018 to correct the books, assuming that the books have not been closed. Disregard effects of corrections on income tax.

Short answer

All the entries are passed for the correction from step 1 to step 5.

Step-by-step solution

First Error

Date	Particulars	Debit ($)	Credit ($)
	Accumulated depreciation- Equipment	25,500
	Depreciation Expense		8,500
	Retained earnings		17,000
	(being error corrected)

	2013-2014 ($)	2015 ($)
Depreciation Taken	170,000	85,000
Less Depreciation (correct)	153,000	76,500
	17,000	8,500

Second Error

Date	Particulars	Debit ($)	Credit ($)
	Retained Earnings	45,000
	Salaries and wages payable		45,000
	(Being error corrected)

Third error

No entry is required

Fourth error

Date	Particulars	Debit ($)	Credit ($)
	Amortization expense	2,250
	Retained earnings	4,500
	Copyrights		6,750
	(being error corrected)

Fifth Error

Date	Particulars	Debit ($)	Credit ($)
	Write off of inventories	87,000
	Retained earnings		87,000
	(being error corrected