Audit Adjustments: During the course of the year 2 audit of Smithstone Company,
ID: 2596979 • Letter: A
Question
Audit Adjustments:
During the course of the year 2 audit of Smithstone Company, the auditor discovered the following situations that the client had not recorded. Your task is to determine if proposing an adjusting entry is required. Each audit finding is independent of any of the other findings. In the boxes next to the situations, indicate from the below selections list of accounts of statements. Select the account or accounts that would comprise the adjusting journal entry, if required, to correct the audit finding. Items on the list may be used, once, more than once, or not at all.
List of Possible Accounts or Statements
Cash
Common Stock
Accounts Receivable
Sales Revenue
Other Current Assets
Allowance for Doubtful Accounts
Land
Operating Expenses (includes all other expenses)
Building
Cost of Goods Sold
Equipment
Interest Expense
Inventory
Miscellaneous Income
Trade Accounts Payable
Accumulated Depreciation
Interest Payable
Disclosures but no entry required
Accrued Liabilities (includes all other payables)
No entry or disclosures required
Audit Finding
Adjusting Journal Entry/Statement
Debit
Credit
The bank's confirmation reply regarding the company's line of credit indicated that the December, year 2, interest was unpaid at year-end. Income statement indicates that eleven months of interest has been expensed in year 2.
Employee overtime pay for hours worked before year-end, but paid in the following year, were not recorded in year 2.
At the end of year 2, a major customer filed for bankruptcy.
Consigned inventory was included in the inventory count. (Smithstone Company is the consignee)
During year 2, a former client sued the company for inappropriate work. Legal counsel has advised that it is "reasonably possible" that the company will be assessed damages. An amount can be estimated.
At the beginning of year 2, Smithstone purchased a small building on a piece of land. The total acquisition price was allocated to land.
Cash
Common Stock
Accounts Receivable
Sales Revenue
Other Current Assets
Allowance for Doubtful Accounts
Land
Operating Expenses (includes all other expenses)
Building
Cost of Goods Sold
Equipment
Interest Expense
Inventory
Miscellaneous Income
Trade Accounts Payable
Accumulated Depreciation
Interest Payable
Disclosures but no entry required
Accrued Liabilities (includes all other payables)
No entry or disclosures required
Explanation / Answer
Solution:
Determining the Proposing an Adjusting Entry is Required, each Audit Finding is Independent of any of the Other Findings:
Audit Finding Adjusting Journal Entry/Statement Debit Credit The bank's confirmation reply regarding the company's line of credit indicated that the December, year 2, interest was unpaid at year-end. Income statement indicates that eleven months of interest has been expensed in year 2. Interest Expense Accrued Liabilties Employee overtime pay for hours worked before year-end, but paid in the following year, were not recorded in year 2. Operating Expenses Accrued Liabilties At the end of year 2, a major customer filed for bankruptcy. Operating Expenses Allowance for Doubtful Accounts Consigned inventory was included in the inventory count. (Smithstone Company is the consignee) No entry or disclosures required No entry or disclosures required During year 2, a former client sued the company for inappropriate work. Legal counsel has advised that it is "reasonably possible" that the company will be assessed damages. An amount can be estimated. Disclosures but no entry required Disclosures but no entry required At the beginning of year 2, Smithstone purchased a small building on a piece of land. The total acquisition price was allocated to land. Building CashRelated Questions
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