You have been engaged to review the financial statements of Flounder Corporation. In the course of your examination, you conclude that the bookkeeper hired during the current year is not doing a good job. You notice a number of irregularities as follows.

1. Year-end wages payable of $3,410 were not recorded because the bookkeeper thought that "they were immaterial."
2. Accrued vacation pay for the year of $30,000 was not recorded because the bookkeeper "never heard that you had to do it."
3. Insurance for a 12-month period purchased on November 1 of this year was charged to insurance expense in the amount of $2,868 because "the amount of the check is about the same every year."
4. Reported sales revenue for the year is $1,928,140. This includes all sales taxes collected for the year. The sales tax rate is 6%. Because the sales tax is forwarded to the state’s Department of Revenue, the Sales Tax Expense account is debited. The bookkeeper thought that "the sales tax is a selling expense." At the end of the current year, the balance in the Sales Tax Expense account is $94,140.

Prepare the necessary correcting entries, assuming that Headland uses a calendar-year basis.

Flounder Corporation

Journal Correcting Entries:

1. Debit Wages & Salaries Account $3,410

Credit Wages & Salaries Payable $3,410

To accrue unpaid wages.

2. Debit Wages $ Salaries Account $30,000

Credit Wages & Salaries Payable $30,000

To record vacation pay for the year.

3. Debit Insurance Prepaid $2,390

Credit Insurance Account $2,390

To account for Insurance Prepaid

4. Debit Sales Tax Expense $109,140

Credit Sales Tax Payable $109,140

To record 6% sales tax on $1,819,000

5. Debit Sales Tax Payable $94,140

Credit Sales Tax Expense $94,140

To record sales tax paid.

Explanation:

1. In accordance with the accrual concept and the matching principle of the US Generally Accepted Accounting Principles, all wages payable must be accrued.  This ensures that expenses are matched to the period's revenue.

2. As in 1, all accrued vacation pay must be recorded.

3. Prepaid insurance must be accrued so that only the period's expense is recognized against the period's income.

4. The Sales Tax is calculated as follows:

Sales Revenue, including sales taxes divided by 106% to give the sales revenue figure.  Then 6% is applied on sales revenue figure to get the Sales Taxes for the year.

Sales Revenue = $1,928,140/106% = $1,819,000

Sales Taxes = 6% of $1,819,000 = $109,140

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