Jacobsen Corporation is negotiating a loan for expansion purposes. Jacobsen’s books and records have never been audited and the bank has requested that an audit be performed and that IFRS be followed. Jacobsen has prepared the following comparative financial statements for the years ended December 31, 2020 and 2019.
JACOBSEN CORPORATION Statement of Financial Position as at December 31, 2020 and 2019 | ||||||||
2020 | 2019 | |||||||
Assets | ||||||||
Current assets | ||||||||
Cash | $163,000 | $ 82,000 | ||||||
Accounts receivable | 392,000 | 296,000 | ||||||
Allowance for doubtful accounts | (37,000 | ) | (18,000 | ) | ||||
Fair value-net income investments | 78,000 | 78,000 | ||||||
Inventory | 207,000 | 202,000 | ||||||
Total current assets | 803,000 | 640,000 | ||||||
Plant assets | ||||||||
Property, plant, and equipment | 167,000 | 169,500 | ||||||
Accumulated depreciation | (121,600 | ) | (106,400 | ) | ||||
Plant assets (net) | 45,400 | 63,100 | ||||||
Total assets | $848,400 | $703,100 | ||||||
Liabilities and Shareholders’ Equity | ||||||||
Liabilities | ||||||||
Accounts payable | $121,400 | $196,100 | ||||||
Shareholders’ equity | ||||||||
Common shares, no par value, 50,000 authorized, 20,000 issued and outstanding | 260,000 | 260,000 | ||||||
Retained earnings | 467,000 | 247,000 | ||||||
Total shareholders’ equity | 727,000 | 507,000 | ||||||
Total liabilities and shareholders’ equity | $848,400 | $703,100 | ||||||
JACOBSEN CORPORATION Statement of Income for the Years Ended December 31, 2020 and 2019 | ||||||||
2020 | 2019 | |||||||
Sales | $1,000,000 | $900,000 | ||||||
Cost of sales | 430,000 | 395,000 | ||||||
Gross profit | 570,000 | 505,000 | ||||||
Operating expenses | 210,000 | 205,000 | ||||||
Administrative expenses | 140,000 | 105,000 | ||||||
350,000 | 310,000 | |||||||
Net income | $ 220,000 | $195,000 |
During the audit, the following additional facts were determined:
1. | An analysis of collections and losses on accounts receivable during the past two years indicates a drop in anticipated bad debt losses. Management has decided that the loss experience rate on sales should be reduced from the recorded 2% to 1.5%, beginning with the year ended December 31, 2020. | |
2. | An analysis of the fair value-net income investments revealed that the total fair value for these investments as at the end of each year was as follows: | |
Dec. 31, 2019$78,000Dec. 31, 2020$65,700 | ||
3. | Inventory at December 31, 2019, was overstated by $9,200 and inventory at December 31, 2020, was overstated by $15,000. | |
4. | On January 2, 2019, equipment costing $32,000 (estimated useful life of 10 years and residual value of $7,000) was incorrectly charged to operating expenses. Jacobsen records depreciation on the straight-line basis. In 2020, fully depreciated equipment (with no residual value) that originally cost $18,900 was sold as scrap for $3,500. Jacobsen credited the $3,500 in proceeds to the equipment account. | |
5. | An analysis of 2019 operating expenses revealed that Jacobsen charged to expense a four-year insurance premium of $5,700 on January 1, 2019. | |
6. | The analysis also revealed that operating expenses were incorrectly classified as part of administrative expenses in the amount of $15,000 in 2019 and $35,000 in 2020. |
Part 1
Prepare the journal entries to correct the books at December 31, 2020. The books for 2020 have not been closed. Ignore income tax effects. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Record journal entries in the order presented in the problem.)
Date | Account Titles and Explanation | Debit | Credit |
1. | |||
(To reflect reduction in loss experience rate) | |||
2. | |||
(To reduce trading securities to fair value) | |||
3. | |||
(To adjust for overstatements in opening and closing Inventories) | |||
4. | |||
(To correct posting of equipment | |||
(To correct the disposal of equipment) | |||
5. | |||
(To adjust for nonrecognition of prepaid expense in 2019) | |||
6. | |||
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Part 2
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Part 3
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