Schaefer Company is in the process of adjusting and correcting its books at the end of 2010. The books are still open for 2010, meaning that the income statement accounts have not be closed out to retained earnings. However, note that in some instances adjusting entries have been made. Schaefer has not yet recorded its 2010 income tax expense and payable amounts so current-year tax effects may be ignored. In reviewing its records, the following information is compiled.
1. Schaefer has failed to accrue sales commissions payable at the end of each of the last 2 years, as follows:
12/31/2009 $3,500
12/31/2010 $2,500
2. In reviewing the December 31, 2011, inventory Schaefer discovered errors in its inventory-taking procedures that have caused inventories for the last 3 years to be incorrect. The company only discovered the issue after making the 2010 year-end entry to adjust inventory and cost of goods sold. The errors are as follows:
12/31/2008 Understated $16,000
12/31/2009 Understated $19,000
12/31/2010 Overstated $ 6,700
3. At December 31, 2010, Schaefer decided to change the depreciation method on its office equipment from double-declining balance to straight-line. The equipment had an original cost of $100,000 when purchased on January 1, 2008. It has a 10-year useful life and no salvage value. Depreciation expense recorded prior to 2010 under the double-declining balance method was $36,000. Schaefer has already recorded 2010 depreciation expense of $12,800 using the double-declining balance method.
4. Before 2010, Schaefer accounted for its income from long-term construction contracts on the completed-contract basis. Early in 2010, Schaefer changed to the percentage-of-completion basis for accounting purposes. It continues to use the completed-contract method for tax purposes. Income for 2010 has been recorded using the percentage-of-complete method. The following information is available:
Pretax Income
Percentage-of-Completion Completed-Contract
Prior to 2010 $150,000 $105,000
2010 60,000 20,000
Required:
1. Prepare the journal entries necessary at December 31, 2010, to record the above corrections and changes.
2. For each situation, indicate specifically how this error affected the financial statements and how the correction or adjustment would be presented in the 2010 financial statements.