bmw0913
Jan 4, 2013, 10:32 AM
You are a CPA and you have been retained to audit the financial statements of the KDR Company for the year ending April 30, 2014.
One of your routine audit procedures is to verify the year end cut-off to ensure that all transactions for the audited year were included but that no transactions for the following year were included. Your review revealed that the employees handling the cash receipts and disbursement journals were behind and closed those journals after the year end cut off April 30, 2014.
You have the following ledger balances:
Cash: $143,500 debit balance
Accounts Receivable: $154,600 debit balance
Inventory: $246,600 debit balance
Accounts Payable: $165,600 credit balance
Other current liabilities: $52,300 credit balance
You are comfortable of the balances for inventory and other current liabilities because you have already confirmed those values.
However, upon investigation of the cash ledger cutoff you have found the following:
• Cash receipts in the total amount of $168,000 were actually collected in May but were entered in the April cash receipts journal. Of this amount, $103,100 was for cash sales and $64,900 was for collections of accounts receivable for which cash discounts of $1,300 were given.
• The April cash disbursements ledger included $81,700 that was actually paid in May. This amount paid a total of $82,600 of accounts payable. Cash discounts of $900 were taken.
Since the audit has not been completed and the financial statements have not been released to the public, the company can still make adjustments to the financial statements.
Instructions:
A: Prepare the journal entries you believe are necessary to correct the year end balances for presentation to management for their consideration.
B: Prepare a brief memo to KDR Company’s management explaining how the errors would have impacted the Company’s working capital and current ratio. (Note: compute working capital and the current ratio before and after the correction.)
I have tried reversing entries but I am not sure if I have the correct accounts. Have looked online for examples but have not come across anything useful. I have also read several books but I am just not grasping it.
One of your routine audit procedures is to verify the year end cut-off to ensure that all transactions for the audited year were included but that no transactions for the following year were included. Your review revealed that the employees handling the cash receipts and disbursement journals were behind and closed those journals after the year end cut off April 30, 2014.
You have the following ledger balances:
Cash: $143,500 debit balance
Accounts Receivable: $154,600 debit balance
Inventory: $246,600 debit balance
Accounts Payable: $165,600 credit balance
Other current liabilities: $52,300 credit balance
You are comfortable of the balances for inventory and other current liabilities because you have already confirmed those values.
However, upon investigation of the cash ledger cutoff you have found the following:
• Cash receipts in the total amount of $168,000 were actually collected in May but were entered in the April cash receipts journal. Of this amount, $103,100 was for cash sales and $64,900 was for collections of accounts receivable for which cash discounts of $1,300 were given.
• The April cash disbursements ledger included $81,700 that was actually paid in May. This amount paid a total of $82,600 of accounts payable. Cash discounts of $900 were taken.
Since the audit has not been completed and the financial statements have not been released to the public, the company can still make adjustments to the financial statements.
Instructions:
A: Prepare the journal entries you believe are necessary to correct the year end balances for presentation to management for their consideration.
B: Prepare a brief memo to KDR Company’s management explaining how the errors would have impacted the Company’s working capital and current ratio. (Note: compute working capital and the current ratio before and after the correction.)
I have tried reversing entries but I am not sure if I have the correct accounts. Have looked online for examples but have not come across anything useful. I have also read several books but I am just not grasping it.