AUDITING II HANDOUT PROBLEM 5 Score Name Section Essay Question (10 points). The

Question

AUDITING II HANDOUT PROBLEM 5 Score Name Section Essay Question (10 points). The following sales were selected for a cutoff test of Arnaz Company, an audit client, for the December 31, 20X3 financial statements. All sales are credit sales and are shipped FOB shipping point. They are recorded on the billing date indicated. The company adds a 25% markup on cost to arrive at the selling price of its merchandise. ARNAZ COMPANY SALES INVOICES SELECTED FOR CUTOFF TEST OF SALES FOR AUDIT YEAR ENDING DECEMBER 31, 20X3 Date Invoice Number 4520 4521 4522 4523 Invoice Amount 45,000 52,000 100,000 65,000 Shipped 12/28/X3 12/29/X3 1/03/X4 1/02/X4 Billed 12/29/X3 1/02/X4 12/31/X3 1/03/X4 What adjusting journal entries, if any, would you make for each of these items? Consider both the revenue and cost implications of this cutoff. Assume the company uses a perpetual inventory system. What complications are created by shipping terms of FOB destination when trying to determine when to record revenue? Under what circumstances might an auditor accept sales that are recorded when shipped, even though they are shipped FOB destination? REQUIRED: (1) (2) (3)

Explanation / Answer

(1) Shipping - FOB shipping point. It means that company can consider the sale of the product as soon as the goods are shipped at shipping point. However, here goods are recorded on the billing date.

Invoice 4520 - No Adjustment.

Because goods are shipped and billed within the year.

Invoice 4521 - Goods are to be recorded as revenue in the current year since the goods are shipped within the year.

Adjustment - 1) Sales to be credited by 52,000 and Accounts Receivable to be debited by 52,000.

2) COGS to be debited by 41,600 and Inventory to be credited by 41,600. (52,000/1.25)

Invoice 4522 - Goods are not to be recorded as revenue in the current year since the goods are shipped in the next year.

Adjustment - 1) Accounts Receivable to be credited by 100,000 and sales are to be debited by 100,000.

2) Inventories to be debited by 80,000 and COGS to be credited by 80,000. (100000/1.25)

Invoice 4523 - No Adjustment.

Because goods are shipped and billed after the year.

(2) The main complications created when the revenue is recorded by shipping terms FOB destination is when you do not get the confirmation that goods have reached the destination.

Also, in case goods are destroyed mid-way, we cannot book the revenue because till the goods reach destination, it is our responsibility to take care of the goods.

(3) When goods are sent out with a clause that if the goods are stolen or destroyed in the mid-way, it will be the responsibility of the customer.

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