The Crafty Ltd is an online retailer of a broad range of art and craft products. You are an audit senior at the firm Star Wars & Co and are planning the financial report audit for the year ended 30 June 2020. The Crafty is a new client to your firm and this is the first year end since you were appointed. The following information was obtained from a meeting with the CEO, Katrina Maglanque.

The company has managed to ride a wave of renewed interest by younger people in arts and crafts and the revenue for 2020 is approximately $3.2 million. This continues a trend that has seen revenue increase by between 20% and 30% consistently for the six years since the company was started by Katrina and her tennis partner Jade Garrard who is the COO. Profits in 2020 are $0.2 million and have not increased significantly in four years despite the increased turnover. In 2016 there are plans to broaden the range of products sold to include bedding, curtains and household furnishings.

Rapid expansion has put pressure on the company’s various systems, not least of which is the online sales order system. The Crafty do not have their own in-house IT function relying on Katrina’s sister Kristine who is responsible for accounting, IT, HR, payroll and general office management.

You are aware that in previous years errors had been detected at the audit stage, partly due to IT system errors and partly due to Kristine’s inexperience as an accountant. Katrina and Kristine are confident that any errors in the financial report will be immaterial and not worth investigating given how busy they are with the growing business.

As part of the growth of the business the company is looking to raise additional bank borrowings to fund more warehouse space and invest in improvements to the IT systems. Katrina has indicated that she needs the audit report signed before 15 September which is when she will be meeting the bank to discuss the details of the loan. Based on the above information, identify and explain five (5) issues that give rise to risks for the financial report external audit you are about to commence.

Based on the above information, identify and explain five (5) issues that give rise to risks for the financial report external audit you are about to commence.    

On 1 November 2018, ACP imported a new multi-colour printing machine (No-10) for $68,300 cash. In addition, ACP paid $6,500 of import duties and $1,200 of transport costs for the machine on 3 November 2018. The useful life of the machine and the residual value were estimated to be 8 years and $7,000 respectively. ACP decides to depreciate the machine using a straight-line basis. The company’s financial year-end is 30 June.

On 30 June 2019, Auckland City Printers revalued the machine to $73,000 following a review by an independent valuer.

On 1 July 2019, due to the changes in technology caused the company to revise the estimated useful life of the printing machine from 8 years to 6 years. On the same day, it was also determined that the residual value of the machine is nil.

On 30 June 2020, the printing machine has been revalued at a fair value of $55,200.

On 30 September 2020, the accountant believes that the value of the printing machine has declined substantially. The value in use is nil, but it is estimated that the company may be able to sell the printing machine for $35,000 to a purchaser and the costs associated with making the sale would be $2,000.

On 1 October 2020, Auckland City Printers sold the printing machine for $32,000 cash.

Required:

(a)   Prepare relevant journal entries to record the depreciation expense for the year ended 30 June 2019 and revaluation entries on 30 June 2019.

(b)   Prepare relevant journal entries to record the depreciation the year ended 30 June 2020 and revaluation entries on 30 June 2020.

(c) Explain the accounting treatment for the transaction on 30 September 2020 in respect of the printing machine with reference to the relevant accounting standards. Prepare the journal entry required.  

(d) Prepare the journal entry required on 1 October 2020 to reflect the disposal of the printing machine. Show all workings.  

The Unadjusted pre-closing 12/31/2020 account balances for the Mahoney Company are listed below:

During your audit, you discover the following four items that have yet to be recorded:

1) No depreciation on the building has been recorded for 2020. Depreciation on the building is based on Double-Declining Balance. It was purchased on 1/1/18 and has an estimated useful life of 40 years. The estimated salvage value is $1,000,000.

2) Mahoney exhanged a machine for a similar machine on 12/31/2020. The origianl machine cost $3,429,000 and has a book value of $2,134,000. The new machine had a fair value of $1,823,000; Mahoney also received $511,000 in cash. The exchange lacked commercial substance.

3) Mahoney uses the Income Statement approach to record Bad Debts. Bad Debts in 2020 are estimate to be 4% of Sales.

4) Ending Inventory is to be estimated using the Gross Profit Method. The historic Gross Profit percentage is 20%.

Required

A) Record journal entries for items #1-3 above; show supporting computations. In addition, compute ending inventory per #4 above; show supporting computations. Assume adjusting/closing entries to adjust inventory, closing Purchases, and Record Cost of Goods Sold were properly made.

B) Draft the 2020 Condensed Income Statement and the 12/31/2020 Balance Sheet. Assume no Taxes. Do not include Earnings Per Share.

Mr Ahmed Kumar runs a snack distribution business located in the Light Industrial area in Lusaka. The following list of balances was extracted from his ledger as at 31 March, 2020; the end of his most recent financial year.

K

Capital                                                                                                83,887

Sales                                                                                                  259,870

Trade accounts payable                                                                 19,840

Returns outwards                                                                             13,407

Allowance for doubtful debts                                                          512

Discounts allowed                                                                            2,306

Discounts received                                                                          1,750

Purchases                                                                                         135,680

Returns inwards                                                                               5,624

Carriage outwards                                                                           4,562

Drawings                                                                                           18,440

Carriage inwards                                                                              11,830

Rent, rates and insurance                                                              25,973

Heating and lighting                                                                         11,010

Postage, stationery and telephone                                               2,410

Advertising                                                                                        5,980

Salaries and wages                                                                         38,521

Bad debts                                                                                          2,008

Cash in hand                                                                                    534

Cash at bank                                                                                    4,440

Inventory as at 1^st April 2019                                                         15,654

Trade accounts receivable                                                             24,500

Fixtures and fittings - at cost                                                          120,740

Prov. for depreciation on fixtures and fittings – 31/03/2020     63,020

Depreciation                                                                                     12,074

The following additional information as at 31^st March, 2020 is available:

(a) Inventory at the close of business was valued at K17,750

(b) Insurances have been prepaid by K1,120

(c) Heating and lighting is accrued by K1,360

(d) Rates have been prepaid by K5,435

(e) The allowance for doubtful debts is to be adjusted so that it is 3% of trade accounts receivable.

Required:

For the year 2020, prepare Mr Kumar’s:

Unadjusted Trial Balance as at 31^st March, 2020.

                                                                                                                              [10 Marks]

General Journal recording the adjustments highlighted above.

                                                                                                                              [10 Marks]

Trading, Profit or Loss statement for the year ended 31^st March, 2020.

[10 Marks]

Statement of financial position as at 31^st March, 2020.

                                                                                                                              [10 Marks]

[

The Unadjusted pre-closing 12/31/2020 account balances for the Mahoney Company are listed below:

During your audit, you discover the following four items that have yet to be recorded:

1) No depreciation on the building has been recorded for 2020. Depreciation on the building is based on Double-Declining Balance. It was purchased on 1/1/18 and has an estimated useful life of 40 years. The estimated salvage value is $1,000.

2) Mahoney exhanged a machine for a similar machine on 12/31/2020. The origianl machine cost $3,429 and has a book value of $2,134. The new machine had a fair value of $1,823; Mahoney also received $511 in cash. The exchange lacked commercial substance.

3) Mahoney uses the Income Statement approach to record Bad Debts. Bad Debts in 2020 are estimate to be 4% of Sales.

4) Ending Inventory is to be estimated using the Gross Profit Method. The historic Gross Profit percentage is 20%.

Required

A) Record journal entries for items #1-3 above; show supporting computations. In addition, compute ending inventory per #4 above; show supporting computations. Assume adjusting/closing entries to adjust inventory, closing Purchases, and Record Cost of Goods Sold were properly made.

B) Draft the 2020 Condensed Income Statement and the 12/31/2020 Balance Sheet. Assume no Taxes. Do not include Earnings Per Share.

On 1 November 2018, Auckland City Printers (ACP) imported a new multi-colour printing machine (No-10) for $68,300 cash. In addition, ACP paid $6,500 of import duties and $1,200 of transport costs for the machine on 3 November 2018. The useful life of the machine and the residual value were estimated to be 8 years and $7,000 respectively. ACP decides to depreciate the machine using straight-line basis. The company’s financial year-end is 30 June.

On 30 June 2019, Auckland City Printers revalued the machine to $73,000 following a review by an independent valuer. On 1 July 2019, due to the changes in technology caused the company to revise the estimated useful life of the printing machine from 8 years to 6 years. On the same day, it was also determined that the residual value of the machine is nil.

On 30 June 2020, the printing machine has been revalued at a fair value of $55,200.

On 30 September 2020, the accountant believes that the value of the printing machine has declined substantially. The value in use is nil, but it is estimated that the company may be able to sell the printing machine for $35,000 to a purchaser and the costs associated with making the sale would be $2,000.

On 1 October 2020, Auckland City Printers sold the printing machine for $32,000 cash.

Required:

(a)Prepare relevant journal entries to record the depreciation expense for the year ended 30 June 2019 and revaluation entries on 30 June 2019.

(b)Prepare relevant journal entries to record the depreciation the year ended 30 June 2020 and revaluation entries on 30 June 2020.

(c) Explain the accounting treatment for the transaction on 30 September 2020 in respect of the printing machine with reference to the relevant accounting standards. Prepare the journal entry required.

(d) Prepare the journal entry required on 1 October 2020 to reflect the disposal of the printing machine. Show all workings.

On 1 November 2018, Auckland City Printers (ACP) imported a new multi-colour printing machine (No-10) for $68,300 cash. In addition, ACP paid $6,500 of import duties and $1,200 of transport costs for the machine on 3 November 2018. The useful life of the machine and the residual value were estimated to be 8 years and $7,000 respectively. ACP decides to depreciate the machine using straight-line basis. The company’s financial year-end is 30 June.

On 30 June 2019, Auckland City Printers revalued the machine to $73,000 following a review by an independent valuer.

On 1 July 2019, due to the changes in technology caused the company to revise the estimated useful life of the printing machine from 8 years to 6 years. On the same day, it was also determined that the residual value of the machine is nil. On 30 June 2020, the printing machine has been revalued at a fair value of $55,200.

On 30 September 2020, the accountant believes that the value of the printing machine has declined substantially. The value in use is nil, but it is estimated that the company may be able to sell the printing machine for $35,000 to a purchaser and the costs associated with making the sale would be $2,000.

On 1 October 2020, Auckland City Printers sold the printing machine for $32,000 cash.

Required: (a)Prepare relevant journal entries to record the depreciation expense for the year ended 30 June 2019 and revaluation entries on 30 June 2019.

(b)Prepare relevant journal entries to record the depreciation the year ended 30 June 2020 and revaluation entries on 30 June 2020.

(c) Explain the accounting treatment for the transaction on 30 September 2020 in respect of the printing machine with reference to the relevant accounting standards. Prepare the journal entry required.

(d) Prepare the journal entry required on 1 October 2020 to reflect the disposal of the printing machine. Show all workings.

Swifty Company purchased a delivery truck for $26,000 on January 1, 2020. The truck has an expected salvage value of $1,000, and is expected to be driven 100,000 miles over its estimated useful life of 10 years. Actual miles driven were 12,800 in 2020 and 12,000 in 2021.

Calculate depreciation expense per mile under units-of-activity method. (Round answer to 2 decimal places, e.g. 0.50.)

eTextbook and Media

List of Accounts

Compute depreciation expense for 2020 and 2021 using (1) the straight-line method, (2) the units-of-activity method, and (3) the double-declining-balance method. (Round depreciation cost per unit to 2 decimal places, e.g. 0.50 and depreciation rate to 0 decimal places, e.g. 15%. Round final answers to 0 decimal places, e.g. 2,125.)

eTextbook and Media

List of Accounts

Assume that Swifty uses the straight-line method. Prepare the journal entry to record 2020 depreciation. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round answers to 0 decimal places, e.g. 2,125.)

eTextbook and Media

List of Accounts

Assume that Swifty uses the straight-line method. Show how the truck would be reported in the December 31, 2020, balance sheet. (Round answers to 0 decimal places, e.g. 2,125.)

Sandhill Company sells televisions at an average price of $812 and also offers to each customer a separate 3-year warranty contract for $84 that requires the company to perform periodic services and to replace defective parts. During 2020, the company sold 282 televisions and 212 warranty contracts for cash. It estimates the 3-year warranty costs as $19 for parts and $29 for labor, and accounts for warranties separately. Assume sales occurred on December 31, 2020, and straight-line recognition of warranty revenues occurs. Record any necessary journal entries in 2020. (If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.) Account Titles and Explanation Debit Credit SHOW LIST OF ACCOUNTS What liability relative to these transactions would appear on the December 31, 2020, balance sheet and how would it be classified? Sandhill Company Balance Sheet (Partial) : $ : $ SHOW LIST OF ACCOUNTS In 2021, Sandhill Company incurred actual costs relative to 2020 television warranty sales of $2,190 for parts and $4,360 for labor. Record any necessary journal entries in 2021 relative to 2020 television warranties. Use "Inventory" account to record the warranty expense. (If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.) Account Titles and Explanation Debit Credit (To record the warranty revenue earned.) (To record the warranty expense.) SHOW LIST OF ACCOUNTS What amounts relative to the 2020 television warranties would appear on the December 31, 2021, balance sheet and how would they be classified? Sandhill Company Balance Sheet (Partial) : $ : $ SHOW LIST OF ACCOUNTS

A. J & B Company uses the percentage of sales approach to estimate its uncollectible accounts. The company’s annual sales for its first financial year of operations ending July 31, 2020 was $500,000, cash sales contributed to 2% of the overall sales and the accounts receivable balance at year end was $75,000. Based on industry expectations, it estimated that 3% of its credit sales would be uncollectible.

Required: Show all workings

a. Calculate the bad debt expense at July 31, 2020.

b. Calculate the net receivable balance that would be reported in the Statement of Financial Position as at July 31, 2020. (1 mark)

B. Tosh and Sons Inc. uses the percentage of receivables approach to estimate its uncollectible accounts. The company had sales of $100,000 at the end of its financial year on June 30, 2020. The allowance for doubtful debts account had a debit balance of $400, the accounts receivable balance was $30,000at year end and the company estimates the uncollectible percentages as follows:

Current (1 - 30 days)   $15,000           0.5%

31 - 60 days                 $10,000           2.0%

61 - 90 days                 $3,000             10.0%

Over 90 days               $2000              60.0%

Required: Show all workings

a. Calculate the bad debt expense at June 30, 2020.

b. Prepare the necessary journal entry to record the bad debt expense for the year.

B. During the financial year ending May 31, 2020 the Board of Directors of Chung Sa Corporation authorised the write off of a $3,000 two-year debt belonging to a previous customer Jap Inc. On July 2, 2020 Chung Sa Corporation received an electronic funds transfer from Jap Inc. in the amount of $3,000.

Required:

Prepare all necessary journal entries to record this transaction.