Question

The first audit of the books of Wildhorse Limited was recently carried out for the year ended December 31, 2022 Wildhorse follows IFRS. 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 2021, 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 2022, the company accrued sales salaries of $51,000 in excess of the correct amount.
3) A tax lawsuit related to the year 2021 was settled late in 2023. It was determined that the company owed an additional $84,000 in tax related to 2021. The company did not record a liability in 2021 or 2022, because the possibility of losing was considered remote. The company charged the $84,000 to retained earnings in 2023 as a correction of a prior year's error.

Answer 1

The subject of this question is Business. The example given involves the examination of books and the identification of accounting errors in a company called Wildhorse Limited.

Step-by-step explanation:

The subject of this question is Business.

Wildhorse Limited is an accounting example that involves the examination of books and the identification of overlooked or incorrectly handled items. The auditor found three different issues related to the company's books, including the incorrect calculation of depreciation, the accrual of excess sales salaries, and the settlement of a tax lawsuit. These examples highlight the importance of accurate accounting practices in business.

Depreciation Adjustment:

The company purchased a machine for $465,000 with a residual value of $31,500 and a useful life of 6 years. Straight-line depreciation should consider the residual value.

The corrected annual depreciation should be:

Cost

−

Residual Value

Useful Life

Useful Life

Cost−Residual Value

​

.

The previous depreciation expense for the three years should be adjusted.

Accrued Sales Salaries Adjustment:

The company accrued sales salaries of $51,000 in excess at the end of 2022.

This adjustment would increase the expenses for 2022, reducing the reported net income.

Tax Lawsuit Settlement Adjustment:

The tax lawsuit settled in 2023 for the year 2021, and the company determined it owed an additional $84,000.

The company did not record a liability in 2021 or 2022, but in 2023, it charged the $84,000 to retained earnings as a correction of a prior year's error.

This adjustment should be reflected in the financial statements for the year 2022, impacting the net income and retained earnings.

In summary, the financial statements and ratios for the year ending December 31, 2022, would be impacted as follows:

Depreciation Adjustment: Decrease in reported net income for the previous years, adjustment to accumulated depreciation, and changes in related ratios.

Accrued Sales Salaries Adjustment: Decrease in reported net income for the year 2022 and changes in related ratios.

Tax Lawsuit Settlement Adjustment: Adjustment to net income for the year 2022, and retained earnings, impacting related ratios.

The adjustments are necessary for the financial statements to reflect the corrected values and provide a more accurate representation of the company's financial position and performance.

Answer 2

This is a Business question at the College level involving errors in accounting for depreciation, accrued expenses, and tax liabilities in a company's books.

Step-by-step explanation:

The subject of this question is Business and it is a College level question.

1) In the first situation, the bookkeeper of Wildhorse Limited made an error in calculating depreciation for a machine purchased in 2021. The correct method for depreciating the machine is to deduct the residual value from the cost and then divide by the useful life. This would result in lower annual depreciation expenses for the machine.

2) The second situation involves the over-accrual of sales salaries at the end of 2022. The company accrued $51,000 more than the correct amount. This needs to be adjusted in the financial statements for the year.

3) In the third situation, the company settled a tax lawsuit in 2023 related to the year 2021. It was determined that the company owed an additional $84,000 in tax. The company did not record a liability in 2021 or 2022, but corrected the error in 2023 by charging the amount to retained earnings.