Question

You have been engaged to review the financial statements of Whispering Corporation. In the course of your examination, you conclude that the bookkeeper hired during the current year is not doing a good job. You notice a number of irregularities as follows:

1. Year-end wages payable of $3,520 were not recorded because the bookkeeper thought that "they were immaterial."
2. Accrued vacation pay for the year of $34,000 was not recorded because the bookkeeper "never heard that you had to do it."
3. Insurance for a 12-month period purchased on November 1 of this year was charged to insurance expense in the amount of $2,568 because "the amount of the check is about the same every year."
4. Reported sales revenue for the year is $2,213,280. This includes all sales taxes collected for the year. The sales tax rate is 6%. Because the sales tax is forwarded to the state’s Department of Revenue, the Sales Tax Expense account is debited. The bookkeeper thought that "the sales tax is a selling expense." At the end of the current year, the balance in the Sales Tax Expense account is $108,580.

Required:
Prepare the necessary correcting entries, assuming that Headland uses a calendar-year basis.

Answer 1

1. Dr Salaries and wages expense $3,520

Cr Salaries and wages payable $3,520

2. Dr Salaries and wages expense $34,000

Cr Salaries and wages payable $34,000

3. Dr Prepaid Insurance$2,140

Cr Insurance Expense $2,140

4. Dr Sales Revenue $132,797

Cr Sales tax payable $132,797

5. Dr Sales tax payable $108,580

Cr Sales tax expense $108,580

Step-by-step explanation:

Preparation of the necessary correcting entries, assuming that Headland uses a calendar-year basis

1. Dr Salaries and wages expense $3,520

Cr Salaries and wages payable $3,520

(Being to record wages payable)

2. Dr Salaries and wages expense $34,000

Cr Salaries and wages payable $34,000

(Being to record accrued vacation payment)

3. Dr Prepaid Insurance$2,140

Cr Insurance Expense $2,140

[$2,568-($2,568*2/12)]

(Being to record 2 months prepaid insurance premium)

4. Dr Sales Revenue $132,797

Cr Sales tax payable $132,797

(6%*$2,213,280)

(Being to record sales tax due)

5. Dr Sales tax payable $108,580

Cr Sales tax expense $108,580

(Being to record prior entry)