You are engaged to perform an audit of the Giordani Corporation for the year end
ID: 2462466 • Letter: Y
Question
You are engaged to perform an audit of the Giordani Corporation for the year ended December 31, 2013. You have decided to perform the following cutoff test for payables and accruals. Select all items greater than $25,000 for two business days before and after year-end from the purchases journal and ensure that all transactions are recorded in the proper period. During your rm’s observation of Giordani’s physical inventory you obtained the following cutoff information: the last receiving report number in 2013 was 49,745. Your audit work identied the following items for fur-ther investigation:
Selections from the December 2013
Purchase Journal Date RR# Vendor Name Amount Explanation
a. 12/30 49,742 Allen Chem. $29,875 Chemicals purchased for manufacturing process.
b. 12/31 none Khan Consulting $45,000 Payment for consulting services for the three-month period beginning December 1, 2013. The $45,000 was charged to consulting expenses.
c. 12/31 49,744 Goff Materials $205,000 Raw materials used in the manufacturing process. Selections from the January 2014 Purchase Journal DateRR#Vendor NameAmountExplanation
d. 1/01 49,746 Temper Trucks $75,985 Purchase of a new forklift.
e. 1/02 49,743 Pack Products $42,000 Paper products used in manufacturing process.
f. 1/02 none Telecom Inc. $32,450 December 2013 telephone bill.
Required: For each of the six items provided in the table above, consider whether there is evidence of proper cutoff of payables and accruals (i.e., the transaction is recorded in the proper period). If the item is not properly recorded, prepare the necessary adjusting entries at December 31, 2013.
Explanation / Answer
The adjusting journal entries for the transactions are as under:
a.
For purchase of chemical for manufacturing process, the journal entry has been passed by debiting purchases and crediting Accounts Payable account. The adjusting journal entry is as under:
31/12 Chemicals $29,875
Accounts Payable Account $29,875
b.
The Payment of consulting expenses for three months that is for the month of December 2013, January 2014 and February 2014 has been recorded as consulting expenses during the year. Whereas the expenses for the month of January 2014 and February 2014 would be recorded as prepaid expenses is as under:
31/12 Consulting Expenses $15,000
Prepaid consulting expenses $30,000
Cash Account $45,000
(Being consulting expenses for the month Jan. and Feb 2014 is recorded as prepaid consulting expenses)
Consulting expenses for 3 months=$45,000
Prepaid consulting expenses for 2 months = ($45,000/3)*2
=$30,000
c.
The adjusting journal entry for Raw material used in manufacturing process is as under:
WIP Account $205,000
Raw Materials Inventory Account $205,0000
d.
the journal entry for purchase of truck is passed after the year end.
1/01 Truck Account $75,985
Cash Account $75,985
e.
1/02 Indirect Material $42,000
WIP Account $42,000
(Being paper products used in manufacturing process)
f.
The telephone expense for the month of December is debited to the account.
31/12 Telephone expenses Account $32,450
Telephone Expenses payable $32,450
(Being telephone expenses for the month of December recorded)
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