At the end of 2013, Castle Consulting did NOT make the adjusting entries indicated

Assignment 1
Question 1:
At the end of 2013, Castle Consulting did NOT make the adjusting entries indicated below.
Indicate the effect of the error on 2013 Net Income, Assets, Liabilities, and Owner’s Equity (on
December 31, 2013). Please specify the dollar effect of the error. Use O for overstate, U for
understate, and NE for no effect. Assume each error is independent of the others.
Error
1. Entry to record interest expense on a short‐
term Note Payable. The note as a balance
of 90,000. The annual interest rate of 8%,
dated May 1. The interest is payable with
the principal at maturity.
2. On July 1st, 2012 the company bought a
machine for 160,000 and debited the entire
amount to expense. The machine has a
useful life of 10 years and no salvage value.
The company would normally have used
the straight line depreciation method. The
company did not correct the error in both
2012 and 2013.
3. Entry to record the expired portion of a
three‐year life insurance policy paid for on
August 1, 2013 for 72,000 and charged to a
permanent account.
4. Entry to record accrued salaries and wages
earned by employees at fiscal year‐end in
the amount of 7,500.
5. Entry to adjust office supplies expense. The
supplies were purchases in 2011 to a
nominal account in the amount of 18,000.
Office Supply on hand at the end of the
2011 is 12,000. Office Supply on hand at the
end of the 2012 is 7,000. Office Supply on
hand at the end of the 2013 is 2,000. No
adjusting entries were made in each of the
years 2011, 2012 and 2013.

Net
Income


Assets

Liabilities





Owner’s
Equity






































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Question 2:
At the beginning of its 2013 calendar‐year accounting period, Commet, Inc. had retained
earnings of $7,500,000. During 2013, Commet reported income from continuing operations
before taxes of $1,200,000. The following additional transactions occurred in 2013 but were not
included in the $1,200,000. Assume all of the following were material.

1. Commet had a restructuring charge of $17,000 (pre‐tax).
2. Commet had an uninsured flood loss of $275,000 (pre‐tax) which was considered to be
both unusual and infrequent in nature.
3. During 2013, Commet decided to sell an unprofitable segment of its business. The sale
of this segment qualifies as a discontinued operation for financial reporting purposes.
However, at the end of 2013, the company had yet to sell the segment. On December
31, 2013 the segment assets had a fair value minus anticipated costs to sell of
$3,800,000 and a book value of $4,100,000. For the year, the segment reported an
operating loss of $600,000.
4. Commet declared and paid cash dividends of $80,000 on its common stock.
5. At the beginning of 2010, the company purchased a machine for $60,000 and fully
expensed it during 2010. The company would normally have used the straight‐line
depreciation method with a $5,000 salvage value and 10 year useful life. This was
discovered as the accountant was reviewing the information for the 2013 financial
statements. Depreciation expense on this machine for 2013 was not included in the
$1,200,000 above.

a. Prepare an income statement for the year 2013, beginning with Income from Continuing
Operations before Taxes. Assume the tax rate was 40%.

b. What is the ending Retained Earnings balance for Commet, Inc. as of December 31,
2013?





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Question 3:
Busby Corp. uses cash‐basis accounting for its records. During 2013, Busby collected $540,000
from its customers, made payments of $372,000 to its suppliers for inventory, and paid
$158,000 for administrative costs. Busby wants to prepare accrual‐basis financial statements. In
gathering information for the accrual‐basis financial statements, Busby discovered the
following:
1. Customers owed Busby $38,000 at the beginning of 2013 and $46,000 at the end of
2013.
2. Busby owed suppliers $29,000 at the beginning of 2013 and $37,000 at the end of the
2013.
3. Busby’s beginning inventory was $52,000 and its ending inventory was $42,000.

What should Busby’s Gross Profit be on accrual basis?

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