Correction Entries for Error Rectification


You have been asked to review the books of Sergio Company on December 30, 2012, before year-end closing. In your audit, you discover certain items that occurred between the years 2010 through 2012. No errors were corrected during those years. The items are summarized below:

a.    On January 1, 2010, Sergio Company purchased a piece of manufacturing equipment for $102,000. It had a $6,000 salvage value and a 10-year useful life. In computing depreciation expense, the bookkeeper failed to deduct salvage value for all years recorded.
b.    The bookkeeper failed to record $55,000 of wages expense in 2011.
c.    The purchase of a $62,500 of Trading Securities was originally recorded in the Investments section of the Balance Sheet. These securities were purchased in 2011.
d.    Beginning merchandise inventory on January 1, 2010 was understated by $10,550.
e.    On October 31st, 2010, Sergio issued a one-year note receivable for $15,300. Payment of the 10 percent note and accrued interest was received upon maturity. The entry on October 31st, 2011 was a debit to Cash for $16,830, a credit to Note Receivable for $15,300, and a credit to Interest Revenue for $1,530. No adjusting entry was made on December 31, 2010.
f.    Goods costing $2,800 were sold for $4,400 to Renfro Co. on December 30, 2010, but the sale was recorded in 2011. The merchandise was shipped F.O.B. shipping point and was not included in ending inventory. Sergio uses a periodic inventory system.
g.    A two-year fire insurance policy was purchased on May 30, 2010, for $8,850. No adjusting entry was made in 2010 or 2011.
h.    At the beginning of 2012, the company changed its method of accounting for bad debts from the direct write-off method to the allowance method. It was determined that an allowance of $45,000 should be established on that date.
i.    A delivery truck with a ten-year life was purchased on January 1, 2010, for $48,800. No depreciation expense was recorded during 2010 or 2011. Assume that the equipment has no salvage value and that Sergio uses the straight-line method for recording depreciation.
j.    In 2012, the company switched from FIFO to LIFO for its inventory valuation. Net income computed using FIFO for years 2010 – 2012 is: 2010- $120,000; 2011 - $80,000 and 2012- $165,000. Net income computed using LIFO for years 2010 – 2012 is: 2010 - $80,000; 2011 - $50,000; 2012 - $130,000.


1. Explain whether each of the above is an accounting change in estimate (or change in estimate affected by a change in principle), change in accounting principle, an error correction or none of the above.

2. Prepare all necessary entries to record/correct the above transactions.  If no entry is required, explain why.


The question belongs to Accounting. The question here is about reviewing the books of accounts of Sergio Company as on 30th December 2012. During the review certain errors were found and need to be corrected. The corrected entries have been given in the solution.

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