Reference no: EM132525094

Company A reported the following income statement for 2019:

                                                     2019                                              2018

Net sales:

Products                               $ 150,000                             $ 115,000

Services                                     70,000                                60,500

Total net sales                           220,000                             175,500

Cost of sales:

Products                                  35,500                                 42,300

Services                                  15,800                                 12,400

Total cost of sales                     51,300                               55,700

Gross profit                               168,700                              119,800

Operating expenses

Depreciation expense               20,200                                18,500

Selling expenses                      16,500                                17,250

Administrative expenses             12,000                              10,750

Total operating expenses            48,700                                46,500

Operating income                      120,000                              73,300

Interest expense                         2,500                               2,200

Income before taxes                 117,500                             71,100

Income tax expense (35%)           41,125                            24,885

Net income                                   $ 76,375                     $ 46,215

As Company A's auditor you noted the following errors:

1. At the end of 2018 the company had a pay period that ended in 2019, but included hours worked in 2018. The company did not accrue for the $3,000 of wages earned in 2018 and instead expensed them when paid in 2019. Company A classifies these wages as selling expenses.

2. Company A recorded service revenue of $18,200 in 2018 for two-year contracts ending in 2019.

3. An offsite warehouse containing $8,650 was left off of the inventory count on December 31, 2018. The following year the same warehouse, now containing $10,300 of inventory was counted twice. Company A uses the periodic method of accounting for inventory.

4. A bookkeeper at Company A set up an automated entry to record depreciation expense of $6,000 each year with no end date. This entry was depreciating a building originally purchased for $140,000 with a salvage value of $20,000 and a useful life of 20 years. The current balance in the related accumulated depreciation account is $132,000.

5. The purchase of new equipment for $5,000 in 2018 was charged as an administrative expense. Company A uses straight line depreciation and assumes there is no salvage value and a useful life of 5 years for this type of equipment.

Instructions

Question a) make schedule showing the proposed correcting journal entries assuming that the books have been closed for 2019.

Question b) make a schedule showing the corrected income statement.

Question c) memo to the audit committee of Company A explaining each error detected and your proposed correction.