Question

Q2. In your audit of Aviary Corporation for calendar year 2016, you found a number of matters that you believe represent possible adjustments to the company’s books. These matters are describe below.

1. Inventory cutoff tests indicate that several sales transactions for goods shipped in 2016 were not recorded. Aviary Corporation uses a perpetual inventory system. The sales were on account, for a total amount of $30,000. The associated inventory cost was $10,000.

2. The company currently has set the allowance for bad debts account at $55,000. Your tests indicate that $85,000 is an appropriate amount for the allowance.

3. Equipment originally costing $800,000 that was fully depreciated with a residual value of $100,000 was sold for $140,000 in December 2016. The purchaser agreed to pay for the equipment by January 2017. No entry has been recorded for this transaction.

4. Miscellaneous expenses of $5,000 was incorrectly classified as accounts payable.

5. The company received new computer equipment valued at $50,000 on January 3, 2017, that had been ordered and shipped F.O.B. shipping point to Westmoreland on December 27, 2016. No entry has been recorded for this purchase, which was financed by a long-term note payable due in full June 30, 2018.

Requirements: 1 of 2: Propose auditor’s adjusting entries for the matters above.

2 of 2: Complete the Unadjusted Misstatement Audit Schedule below. Use positive numbers to indicate overstatements, and negative numbers to indicate understatements. Current Assets Noncurrent Assets Current Liabilities Noncurrent Liabilities Income Before Tax 1. 2. 3. 4. 5. Totals

Answer 1

Adjustment Entries to be passed for the observations-:

1) Accounts receivable A/c $Dr. 30,000

To Revenue from Sale of Goods A/c $30,000

(Being sale of goods not recorded in the Company)

Cost of Goods Sold A/c $10,000

To Finished Goods A/c $10,000

(Being cost of goods sold recorded for the period)

2) Provision for bad debt (PnL Item) ($85,000 - $55,000) $30,000 A/c Dr.

To Allowance for uncollectible A/c $30,000

(Being further bad debt provision to be created by the Company)

3) Gain on sale of equipment = $140,000 - $100,000 =$40,000

Amount receivable upon sale of equipment A/c Dr $140,000

Accumulated Depreciation A/c Dr. ($800,000 - $100,000) $700,000

To Gross Block A/c $800,000

To Gain on sale of equipment A/c $40,000

(Being sale of equipment to be recorded in the books)

4) Accounts payable A/c Dr. $5,000

To Misc. Expenses A/c $5,000

(Being re-class of misc expenses payable from accounts payable)

5) Since the purchasing terms is FOB shipment and goods were shipped before year end, hence it needs to be accounted.

Capital Work in progress A/c Dr. $50,000

To Notes payable A/c $50,000

(Being fixed assets on transit needs to be recorded)

2) Summary of identified misstatements-:

	Amount	Balance Sheet	Statement of Profit and Loss
Particulars	Debit	Credit	Asset	Liability	Income	Expense
Accounts Receivable A/c Dr.	$       30,000	$             -	$        30,000	$               -	$                      -
To Revenue from Sale of Goods A/c	$             -	$       30,000	$               -	$               -	$                30,000	$                  -
(Being sale of goods not recorded in the Company)
Provision for bad debt (PnL Item) A/c Dr.	$       30,000	$             -	$               -	$               -	$                      -	$           30,000
To Allowance for uncollectible A/c	$             -	$       30,000	$               -	$        30,000	$                      -	$                  -
(Being further bad debt provision to be created by the Company)
Amount receivable upon sale of equipment A/c Dr	$     140,000	$             -	$       140,000	$               -	$                      -	$                  -
Accumulated Depreciation A/c Dr	$     700,000	$             -	$               -	$     -700,000	$                      -	$                  -
To Gross Block A/c	$             -	$     800,000	$     -800,000	$               -	$                      -	$                  -
To Gain on sale of equipment A/c	$             -	$       40,000	$               -	$               -	$                40,000	$                  -
(Being sale of equipment to be recorded in the books)
Accounts payable A/c Dr.	$         5,000		$               -	$          5,000	$                      -	$                  -
To Misc. Expenses payable A/c		$         5,000	$               -	$         -5,000	$                      -	$                  -
(Being re-class of misc expenses payable from accounts payable)
Capital Work in progress A/c Dr.	$       50,000	$             -	$        50,000	$               -	$                      -	$                  -
To Notes payable A/c	$             -	$       50,000	$               -	$        50,000	$                      -	$                  -
(Being fixed assets on transit needs to be recorded)
	$     955,000	$     955,000	$     -580,000	$     -620,000	$                70,000	$           30,000