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.