Question

Conrad Playground Supply underwent a restructuring in 2021. The company conducted a thorough internal audit, during which the following facts were discovered. The audit occurred during 2021 before any adjusting entries or closing entries are prepared. a. Additional computers were acquired at the beginning of 2019 and added to the company's office network. The $47,500 cost of the computers was inadvertently recorded as maintenance expense. Computers have five-year useful lives and no material salvage value. This class of equipment is depreciated by the straight-line method. b. Two weeks prior to the audit, the company paid $19,500 for assembly tools and recorded the expenditure as office supplies. The error was discovered a week later. c. On December 31,2020 , merchandise inventory was understated by $83,000 due to a mistake in the physical inventory count. The company uses the periodic inventory system.

Answer 1

a. Additional Computers Acquisition: Error: The cost of computers ($47,500) was mistakenly recorded as maintenance expense.

b. Assembly Tools Expenditure: Error: The payment for assembly tools ($19,500) was incorrectly recorded as office supplies.

c. Merchandise Inventory Understatement: Error: Merchandise inventory was understated by $83,000 due to a mistake in the physical count as of December 31, 2020.

What inform the errors and the adjustments?

Based on the information provided, there are three errors that were discovered during the internal audit at Conrad Playground Supply. Let's analyze each error and determine the necessary adjustments:

a. Additional Computers Acquisition:

- Error: The cost of computers ($47,500) was mistakenly recorded as maintenance expense.

- Correction: Adjust the accounting records to capitalize the cost of computers and depreciate them over their useful life.

- Journal Entry:

Debit: Computer Equipment $47,500

Credit: Accumulated Depreciation - Computer Equipment $9,500

Credit: Maintenance Expense $38,000

- This journal entry capitalizes the cost of computers and recognizes the depreciation expense for the current year.

b. Assembly Tools Expenditure:

- Error: The payment for assembly tools ($19,500) was incorrectly recorded as office supplies.

- Correction: Adjust the accounting records to reclassify the expenditure to the appropriate account.

- Journal Entry:

Debit: Assembly Tools $19,500

Credit: Office Supplies $19,500

- This journal entry corrects the classification error and reflects the accurate account for assembly tools.

c. Merchandise Inventory Understatement:

- Error: Merchandise inventory was understated by $83,000 due to a mistake in the physical count as of December 31, 2020.

- Correction: Adjust the ending inventory to reflect the correct amount.

- Journal Entry:

Debit: Merchandise Inventory $83,000

Credit: Retained Earnings $83,000

- This journal entry adjusts the understated merchandise inventory and increases retained earnings.

After making these adjustments, the financial statements should more accurately reflect the company's financial position. Note that these adjustments are made before any adjusting entries or closing entries for the year 2021 are prepared.