Question

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.

1. 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.
2. A used truck, purchased on November 18, 2017, was recorded with this entry:
   
   To record truck expenditure:
   

   DR Vehicle Expense	$	18,000
   CR Cash				$	18,000

   
   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 acquired.
   

3. 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.
4. 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 uncollectible.
5. 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.
6. 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.

Required:

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.)

Answer 1

	JOURNAL ENTRIES
	Account Title	Debit	Credit
1	DIGITAL IMAGING SYSTEM
	Office Equipment	$5,000
	Office expense		$5,000
	Depreciation expense-Office Equipment	$1,250		(5000/4)
	Accumulated depreciation-Office Equipment		$1,250
2	USED TRUCK
	Vehicles	$18,000
	Vehicle Expense		$18,000
	Depreciation expense-Vehicles	$2,500		50%*(18000-3000)/3
	Accumulated depreciation-Vehicles		$2,500
3	RENT EXPENSE
	Rent Expense	$18,000
	Buildings		$18,000
4	CUSTOMER PAYMENT ON ACCOUNT
	Retained Earnings	$23,500
	Bad debt expenses		$23,500
5	INSURANCE POLICY
	Insurance expense	$10,000
	Prepaid insurance	$10,000
	Retained Earnings		$20,000
6	Retained Earnings	$2,000		(8000*(3/12)
	Interest expense		$2,000