You have been engaged to review the financial statements of Water Sync Inc. In the course of your
investigation you find a number of irregularities during the current year.
1. Insurance for a 6-month period purchased on October 1 of this year was charged to prepaid
insurance in the amount of $5,000.
2. Year-end estimate of bonuses totaled $61,000 and was not recorded because the payment
would not be made until next year.
3. Warranty expense averages 5% on current year sales of $5,000,000. Warranty expense is
automatically debited for 5% of each sale. During the current year, the company also paid
$225,000 in warranty related claims. The bookkeeper thought that the payments were an
expense and debited warranty expense.
4. Office rent is paid quarterly in advance. The first quarter rent for next year ($25,000) was paid in
December and rent expense was debited.
Instructions
Prepare the necessary correcting entries, assuming that Water Sync Inc. uses a calendar-year basis.