Question

You have been engaged to audit James Company for the year ended12/31/16. James has not been audited since its inception on12/31/13. James Company had tax rates of 24% in 2014 and 29% in2015 and 31% in 2016. The client made the 2014 and 2015 adjustingjournal entries based on all of the original journal entries made.Thus if the original journal entry is incorrect, so is the relatedadjusting journal entry. The 12/31/16 adjusting entries have notyet been made. Both 2014 and 2015 financial statements have beenissued to the public, thus they are closed years. 2016 financialstatements have not yet been issued, thus it is an open year.

James Company provides you with the following informationrelated to Property Plant and Equipment transactions since1/1/14.

1/17/14 Purchased 2 identical pieces of equipment by putting$43,000 cash down and signing a $378,000 5 year 4.3% note when themarket interest rate was 8.68%. James recorded the equipment at$378,000 and depreciated it using double declining balance and a5-year life. Interest only is paid annually each 12/31.

6/12/14 James Company bought a building by issuing 36,000 sharesof its $10 par common stock. The last stock sale was on 6/10/14 for$19.62 per share. The building was recorded at $360,000 anddepreciated over a 30-year life using straight line depreciationand a 8% salvage value.

9/27/15 Received machinery in exchange for an auto and $13,650cash. The historical cost of the auto was $28,500 on 8/14/13 andwas depreciated using 150% declining balance over a 5-year lifewith no salvage value. James recorded the new machine at $28,500.The fair market value of the auto on 9/27/2015 was $13,900. Thistrade lacks commercial substance. Depreciation on the new auto isover 5 years using 150% declining balance and no salvage value.

9/30/15 Purchased a computer for $22,900 cash and wrote theentire computer off to supplies expense. James uses a 5-yearstraight line depreciaton method for all other technologicalequipment with no salvage value.

7/13/16 Sold one of the pieces of equipment bought on 1/17/14for $96,000 and recorded a loss of $93,000.

08/01/16 Received donated equipment form Fuller Company. Fullerhad a book value in this equipment of $102,000 on 8/01/16 so thatis the amount James Company recorded the donated equipment. Thefair market value of the equipment on 8/01/16 was $154,000. Jamescredited accumulated depreciation for $102,000 also. The equipmentshould have a 7 year estimated life, a 4% estimated salvage valueand use the Sum of Years Depreciation method.

Required:

Part 1: Using three columns analyze what James did do,should have done, and the effect on whatever accounts wereeffected. Provide this analysis on each entryseparately.

Part 2: Provide an analysis of the cumulative effectthrough 2016.

Part 3: As if part one was not done, prepare thenecessary correcting journal and adjusting entries to make allaccounts properly stated as of post-adjusted12/31/16.

You may do this in a single entry or multipleentries.

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