Reference no: EM132966338
The first audit of the books of Gomez Limited was recently carried out for the year ended December 31, 2020. In examining the books, the auditor found that certain items had been overlooked or might have been incorrectly handled in the past:
1. At the beginning of 2018, the company purchased a machine for $465,000 (residual value of $31,500) that had a useful life of 6 years. The bookkeeper used straight-line depreciation but failed to deduct the residual value in calculating the depreciation base for the three years.
2. At the end of 2019, the company accrued sales salaries of $47,500 in excess of the correct amount.
3. A tax lawsuit that involved the year 2018 was settled late in 2020. It was determined that the company owed an additional $82,000 in tax related to 2018. The company did not record a liability in 2018 or 2019, because the possibility of losing was considered remote. The company charged the $82,000 to retained earnings in 2020 as a correction of a prior year's error.
4. Gomez purchased another company early in 2016 and recorded goodwill of $518,000. Gomez amortized $25,900 of goodwill in 2016, and $51,800 in each subsequent year. The tax treatment for goodwill was properly applied.
5. In 2020, the company changed its basis of inventory costing from FIFO to weighted average cost. The change's cumulative effect was to decrease net income of prior years by $51,000. The company debited this cumulative effect to Retained Earnings, and recorded the related income tax effect. The weighted average cost formula was used in calculating income for 2020.
6. In 2020, the company wrote off $72,000 of inventory that it discovered, in 2020, had been stolen from one of its warehouses in 2019. This loss was charged to the Loss on Impairment account in 2020.
Required:
Problem 1. Prepare the required journal entries
Problem 2. Identify the type of change for each of the six items.
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