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It’s January12, 2010. You’vejust beennewlyhired as the accountant for Pampered Pets, Inc., a small
businessthat manufacturesand sells specialtypet productsforcats and dogs.Their last realaccountant quit
on Feb 15,2009,and, asacostsaving measure,the owner hasbeen doing the accountingsince then. To put
the situation in perspective,he onlyhadaccountingprinciples 15yearsago and receivedaD for hisefforts.
Attachedisthetrial balancehe had prepared, and included in itwere the adjustments for depreciation,
inventory shrinkage, supplies,and the bad debtallowance.(Theseare the ONLYadjustments recorded.)
This companyuses a perpetualsystem torecord itsinventory.Becauseitwasin balance,the owner assumed
that there werenoerrors until he received noticefrom thebankthat thecompany’s checking account(the
onlycashaccount)was overdrawnasof December 31,2009.(Reconcilingthechecking account was not high
on his listof priorities.)Sincethe owner thought he hadalmost$90,000 incash, (giveor take afewthousand)
hefiguredthat he must havemade a few mistakes or forgotten something. So, after he dealtwith the mess at
the bank,hehiredyou.
After talking to other employees, and examiningpaperwork from varioussources, you discovered that there
weretransactions thatwere omitted entirelyfrom the trial balance.(Apparently,if theownerdidn’t know
what todo withatransaction, hestuck thepaperwork inadrawer.)By theendof theyear hehad totally
forgotten thesetransactions. You’ve just received the paperworksupportingthese forgotten transactions and,
in addition, you have unearthed the followinginformation:
1. Inexamining the details of theGeneral Ledger “Patent” account, youfound thefollowing:
No entries had been made to the account during2009.The detail to support the balanceon your trial
balancefollows:
The companycurrently owns 2 patents.
The first patentwaspurchased byPampered Pets on January6,2006, atacost of$20,000. This patent
protectstheself-cleaningkittybox manufactured by the company.When itwasoriginallyacquired,18
yearsremained in thelegal life of thispatent and thecompany feelsto renew that patentafter that date
won’t becost effective. The company originally seta§fullif~f 1 0y~and,through the endof
2008, amortization had been enteredontothe booksusingthatassumption. During the springof
2009,Pampered Petsinitiated a lawsuitagainstacompetitor whohad begun producing a very similar
product.The unreimbursed costs ofthelegalactionwere $21,800.(You found the attorney’s bill for
servicesrendered dated July 10, 2009, and the statement indicating acash paymentwasreceived in full
in thedrawer of ignored transactions.) On July2, 2009,thecourtsheld for Pampered Pets.As a result
ofthelawsuit, management nowbelievesthat theuseful lifeof thispatentshould be a total of 15years
insteadof the original 10.
A second patentwaspending as ofJanuary1,2009,for a special type of fresh scentkittylitter designed
tobeused with the self-cleaning kittybox. Thevalue assigned to thispatentwas$37,000 and allthe
costs wereincurredand paid in 2008. Thecompanyreceived notification that thepatent wasawarded
onOctober 12,2009. Thelegal life of thispatent is 20 yearsand itwill not be renewed even though
management believes theywill manufacturethekittylitter indefinitely.
Pagelof6