You have been asked by a client to review the records of Pina Company, a small m
ID: 2567597 • Letter: Y
Question
You have been asked by a client to review the records of Pina Company, a small manufacturer of precision tools and machines. Your client is interested in buying the business, and arrangements have been made for you to review the accounting records. Your examination reveals the following information.
4. All machines are sold subject to a 5-year warranty. It is estimated that the expense ultimately to be incurred in connection with the warranty will amount to 12 of 1% of sales. The company has charged an expense account for warranty costs incurred.
Sales per books and warranty costs were as follows.
Warranty Expense
for Sales Made in
Year Ended
March 31
Sales
2016
2017
2018
Total
Can you explain how to compute the figures in the sections outlined in red? Thanks.
Warranty Expense
for Sales Made in
Year Ended
March 31
Sales
2016
2017
2018
Total
Pina Company Limited Schedule of revised net income Computations Summary 2016 -2017-120181 2016 2017 2018
Explanation / Answer
The Answer not only includes the impact of adjustment number 4, but also of other adjustments which must have been given in the question.
Anyways, looking at the solution the probable explanation of the calculation is as follows:
Correction for Consignment:
Goods having sales price of $6760 were consigned in the year 2016 but the machines have not been sold. So the Sales of the year 2016 should be reduced by that amount and the sales of 2017 should be increased by the said amount.
Goods having sales price of $5814 were consigned in the year 2018 but the machines have not been sold. So the Sales of the year 2018 should be reduced by that amount and the sales of 2019 should be increased by the said amount.
Correction for C.O.D Sale:
Goods having sales price of $6344 have been sold on C.O.D in the year 2017 but the samae has not been recognised as revenue.
It may have been given in the question that the Conditions for revenue recognition have been satisfied (example of revenue recognition condition is- Risk and rewards have been transferred) but as a mistake the revenue has been recognised in the subsequent year.
Hence to correct the same, sales of the value $6344 have been reduced from the year 2018 and have been added to the year 2017.
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