Question

You have been engaged to review the financial statements of Headland Corporation. In the course of your examination, you conclude that the bookkeeper hired during the current year is not doing a good job. You notice a number of irregularities as follows. 1. 2. 3. Year-end wages payable of $3,200 were not recorded because the bookkeeper thought that they were immaterial." Accrued vacation pay for the year of $34,000 was not recorded because the bookkeeper "never heard that you had to do it Insurance for a 12-month period purchased on November 1 of this year was charged to insurance expense in the amount of $2,388 because the amount of the check is about the same every year." Reported sales revenue for the year is $2,073,360. This includes all sales taxes collected for the year. The sales tax rate is 6%. Because the sales tax is forwarded to the state's Department of Revenue, the Sales Tax Expense account is debited. The bookkeeper thought that the sales tax is a selling expense." At the end of the current year, the balance in the Sales Tax Expense account is $101.660. 4. Prepare the necessary correcting entries, assuming that Headland uses a calendar-year basis. The books for the current year have not been closed. (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 for the amounts.) No. Account Titles and Explanation Debit Credit 1. 2. 3. 4. (To record the sales taxes due.) (To correct prior entry.)

Answer 1

Debit Credit No. Accounts & Explanation 1) Salaries and Wages Expenses Salaries and Wages Payable $ 3,200 $ 3,200 2) Salaries and Wages Expenses $ 34,000 Salaries and Wages Payable $ 34,000 3) Prepaid Insurance $ 1,990 Insurance Expenses (*) $ 1,990 $ 117,360 4) Sales Revenue Sales Tax payable (**) (To record sales tax due) $ 117,360 $ 101,660 Sales Tax Payable Sales Tax Expenses (To correct prior entry) $ 101,660 Explanation : (*) Insurance Paid on Nov 1, has 2 months expenses for current year rest is prepaid for next year = ($2,388 * 10 month)/12 months = $1,990 is Prepaid Insurance (**) Sales Revenue includes sales Tax thus Sales tax payable is ($2073360 *6/106) = $117,360