In 2017, the new CEO of Watsontown Electric Supply became
concerned about the company’s apparently deteriorating financial
position. Wishing to make certain that the grim monthly reports he
was receiving from the company’s bookkeeper were accurate, the CEO
engaged a CPA firm to examine the company’s financial records. The
CPA firm discovered the following facts during the course of the
engagement, which was completed prior to any adjusting or closing
entries being prepared for 2017.
- A new digital imaging system was acquired on January 5, 2016,
at a cost of $5,000. Although this asset was expected to be in use
for the next four years, the purchase was inadvertently charged to
office expense. Per the company’s accounting manual, office
equipment of this type should be depreciated using the
straight-line method with no salvage value assumed.
- A used truck, purchased on November 18, 2017, was recorded with
To record truck expenditure:
|DR Vehicle Expense
Management plans to use this truck for three years and then trade
it in on a new one. Salvage is estimated at $3,000. Watsontown has
always used straight-line depreciation for fixed assets, recording
a half-year of depreciation in the year the asset is
- On July 1, 2017, the company rented a warehouse for three
years. The lease agreement specified that each year’s rent be paid
in advance, so a check for the first year’s rent of $18,000 was
issued and recorded as an addition to the Buildings account.
- Late in 2016, Watsontown collected $23,500 from a customer in
full payment of his account. The cash receipt was credited to
revenue. In 2017, Watsontown’s bookkeeper was reviewing outstanding
receivables and noticed the outstanding balance. Knowing the
customer in question had recently died, she wrote off the account.
Because Watsontown seldom has bad debts, the company uses the
direct write-off method whereby it charges Bad debts expense and
credits Accounts receivable when an account is deemed
- A three-year property and casualty insurance policy was
purchased in January 2016 for $30,000. The entire amount was
recorded as an insurance expense at the time.
- On October 1, 2016, Watsontown borrowed $100,000 from a local
bank. The loan terms specified annual interest payments of $8,000
on the anniversary date of the loan. The first interest payment was
made on October 1, 2017, and expensed in its entirety.
Prepare any journal entry necessary to correct each error as
well as any year-end adjusting entry for 2017 related to the
described situation. Ignore income tax effects. (If no
entry is required for a particular transaction, select "No journal
entry required" in the first account field.)