Question

You are the Finance Manager of Keiso Inc., a furniture manufacturer. Your staff member has prepared draft financial statements as at/for the year ended December 31, 2018. (ie all entries are done except for any corrections you propose.)

On review of the statements you note the following relating to events occurring in 2018:

A. Keiso was served with a lawsuit during 2018 for faulty product. The claim is $100,000 and Keiso’s lawyer estimates that it is highly likely they will have to pay $35,000 for this claim. Keiso did not record any amount in the financial statements related to the lawsuit as it will not go to court until September 2019.

B. Keiso signed a one-year lease in December 2018 for rental of a facility starting January 1, 2019. Upon signing the lease, Keiso paid the January 2019 rent of $9,000 and a damage deposit of $5,000, both of which the accountant recorded as rent expense in 2018.

C. During Bankrupt Ltd.’s liquidation sales, Keiso purchased furniture inventory, valued at $30,000, for $20,000. The accountant recorded the inventory at $30,000 and recorded the $10,000 difference between the amount paid and the value as a gain.

D. Keiso paid $60,000 for a truck on Jan 1, 2018. The truck is being depreciated straight line over 6 years. You determine that the truck has been used throughout the year (and will continue to be used) 100% for personal use by the majority shareholder of the company.

E. Keiso also performs furniture cleaning. A customer, Picky, purchased furniture and paid for a non-refundable cleaning of $1,000 that can be redeemed anytime in three years. Picky hadn’t yet booked the service at year end. Keiso recorded the revenue as the sale was non-refundable.

Required (State any assumptions needed): For each letter item above, prepare the following:

i) Prepare any necessary journal entries for 2018 for Keiso to correct any of the above treatments. If no adjustment is necessary, you must indicate “No Entry”. (Always show any calculations.)

ii) EXPLAIN why you made the adjustment (or no adjustment) in (i) using and applying at least one foundational principle or element characteristic from the conceptual framework as support.

Answer 1

		Journal Entry - Keiso Inc
A	Lawsuit Expenses A/c Dr.				$35,000
	To estimated lawsuit liability A/c					$35,000
	A contingent liability is recorded in accounting records if the contingency is likely
	to occur and the amount can be reasonably estimated.
	Since, Keiso's lawyer has estimated that it is likely that they will have to pay
	$35000 for the claim,a provision representing such liability should be created.
B	Refundable damage deposit A/c Dr.				$5,000
	To Rent expense A/c					$5,000
	The amount of damage deposit would not be accounted for as rent expense for the year as
	the amount paid towards deposit would be refundable at the end of lease term.
	Prepaid rent A/c Dr.				$9,000
	To Rent expense A/c					$9,000
	One year lease facility would pertain to the year 2019-2020 as it starts from January 1,2019
	Rent of $9000 and damage deposit of $ 5000 recorded as rent expense by the accountant in 2018 is
	inappropriate as it belongs to next financial year.
	Since, the, lease agreement has been entered into in Dec 2018,the same would be recognized
	as prepaid rent in 2018.
C	NO ENTRY
	The entry accounted for by the accountant is correct as the inventory is valued at $30000
	and profit on purchase of inventory of $10000 shall be transferred to Profit/Loss A/c
D	Personal Expenses A/c Dr.				$60,000
	To Depreciation A/c					$10,000
	To Truck A/c					$50,000
	Where the asset being purchased by business is used throughout the year for personal
	purpose by the shareholders,depreciation on the same cannot be provided for in books.
	Purchase of truck and depreciation on same has been recognized in books which is completely
	used for personal use needs to be reversed.
	The amount recorded as personal expenses would be then transferred to shareholders account.
	(Depreciation calculation = 60000/6 = 10000 p.a)
E	Sale A/c Dr.				$1,000
	To advance received for cleaning A/c					$1,000
	Amount received towards non-refundable cleaning that can be redeemed anytime in 3 years
	cannot be recognized as revenue since,the customer hadn't booked the service till year end.
	$1000 received for cleaning would be recorded as advance received and recognized as sale only
	in the year in which the customer books its service.