[Recommended] Loan Terms Specified Annual

[Recommended] Loan Terms Specified Annual

In 20X2, the new CEO of Watsontown Electric Supply became concerned about the company’s apparently deteriorating financial position. Wishing to make certain that the grim monthly reports he was receiving from the company’s bookkeeper were accurate, the CEO engaged a CPA firm to examine the company’s financial records. The CPA firm discovered the following facts during the course of the engagement, which was completed prior to any adjusting or closing entries being prepared for 20X2.

  1. A new digital imaging system was acquired on January 5, 20X1, at a cost of $5,000. Although this asset was expected to be in use for the next four years, the purchase was inadvertently charged to office expense. Per the company’s accounting manual, office equipment of this type should be depreciated using the straight-line method with no salvage value assumed.
  2. A used truck, purchased on November 18, 20X2, was recorded with this entry:To record truck expenditure:    Vehicle Expense$18,000    Cash   $18,000 Management plans to use this truck for three years and then trade it in on a new one. Salvage is estimated at $3,000. Watsontown has always used straight-line depreciation for fixed assets, recording a half year of depreciation in the year the asset is acquired.
  3. On July 1, 20X2, the company rented a warehouse for three years. The lease agreement specified that each year’s rent be paid in advance, so a check for the first year’s rent of $18,000 was issued and recorded as an addition to the Buildings account.
  4. Late in 20X1, Watsontown collected $23,500 from a customer in full payment of his account. The cash receipt was credited to revenue. In 20X2, Watsontown’s bookkeeper was reviewing outstanding receivables and noticed the outstanding balance. Knowing the customer in question had recently died, she wrote off the account. Because Watsontown seldom has bad debts, the company uses the direct write-off method whereby it charges Bad debts expense and credits Accounts receivable when an account is deemed uncollectible.
  5. A three-year property and casualty insurance policy was purchased in January 20X1 for $30,000. The entire amount was recorded as an insurance expense at the time.
  6. On October 1, 20X1, Watsontown borrowed $100,000 from a local bank. The loan terms specified annual interest payments of $8,000 on the anniversary date of the loan. The first interest payment was made on October 1, 20X2, and expensed in its entirety.


Prepare any journal entry necessary to correct each error as well as any year-end adjusting entry for 20X2 related to the described situation. Ignore income tax effects. (If no entry is required for a particular transaction, select “No journal entry required” in the first account field. Do not round intermediate calculations.)

  • 1Prepare the entry to capitalize the equipment that was purchased in 20X1 and improperly expensed.
  • 2Prepare the entry to record the 20X2 depreciation on equipment.
  • 3Prepare the entry to properly capitalize the vehicle that was expensed when purchased.
  • 4Prepare the entry to record the 20X2 depreciation on the capitalized vehicle.
  • 5Prepare the entry to correctly record the rent prepayment.
  • 6Prepare the adjusting entry to record the use of the warehouse in 20X2.
  • 7Prepare the entry to correct the overstatement of revenue in 20X1 and to record the collection of accounts receivable.
  • 8Prepare the entry to reverse the improper write-off of accounts receivable in 20X2.
  • 9Prepare the entry to correct the overstatement of insurance expense in 20X1 and to record the 20X2 insurance expense.
  • 10Prepare the entry to correct the failure to accrue interest in 20X1.
  • 11Prepare the adjusting entry to accrue interest in 20X2.

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