Question

Ridley Corporation is in the process of adjusting and correcting its books at the end of 2020. In reviewing its records, the following information was discovered. Prepare the journal entries necessary at December 31, 2020, to record the corrections and changes. The books are still open for 2020. The income tax rate is 40%. The company has not yet recorded its 2020 income tax expense and payable amounts so current-year tax effects may be ignored. Prior-year tax effects must be considered in item 4. 5. A collection of $5,600 on account from a customer received on December 31, 2020, was not recorded until January 2, 2021.

Answer 1

Here are the journal entries to record the corrections and changes at December 31, 2020:

1. Incorrect recording of equipment purchase - the $12,000 equipment actually purchased on 12/31/20.

Debit Equipment $12,000

Credit Accounts Payable $12,000

2. Unrecorded sale of land - the company sold land with a book value of $25,000 for $42,000 cash.

Debit Cash $42,000

Debit Gain on Sale of Land $17,000

Credit Land $25,000

Credit Accumulated Depreciation $8,000

3. Unrecorded expense - prepaid insurance expense of $3,000 expired on 12/31/20.

Debit Insurance Expense $3,000

Credit Prepaid Insurance $3,000

4. Understatement of depreciation in prior years - additional depreciation of $10,000 should have been recorded in prior years. The tax effect is $4,000.

Debit Accumulated Depreciation $10,000

Debit Deferred Tax Asset $4,000

Credit Provision for Income Taxes $4,000

5. Collection received on 12/31/20 but not recorded until 1/2/21 -

Debit Accounts Receivable $5,600

Credit Cash $5,600

The net income effect of the above corrections is to increase net income by $11,000.

Please let me know if any additional explanations or details are needed.