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.

This is what I have come up with so far but I am very confused and not sure if I have it correct.

April Sales Dr.168,000
Cash Receipts Cr.168,000
(to reverse amount recorded in April that occurred in May)

May Cash Sales Dr. 103,100
Accounts Receivable Cr. 64,900
Cash Receipts Cr. 168,000

You're not far off the mark.

You've (correctly) credited the cash account with the $168,000, as this amount was received in May, but your adjustment for sales is wrong.

The question is telling you that of the $168,000 cash received, $103,100 is for cash sales that happened May. The other $64,900 relates to payments towards accounts receivable (ie credit sales which took place before the year end). Therefore the sales figure for the year ended is only reduced by the CASH sales that took place in May. So what you need to do is:

DR: sales at 30 April: $103,100
DR: accounts receivable at 30 April: $64,900
Cr: cash at 30 April: $168,000

This kind of looks like what you've tried to do in your second journal entry, but you've credited accounts receivable instead of debiting it.

You haven't taken any notice of the discount allowed though. Discount allowed - $1,300 in this case, means that the actual amount due on accounts receivable at the end of April was the $64,900 cash payment, + the $1,300 discount given which means to restore accounts receivable back to its actual position at the year end, you need to add back the $1,300 to it as well.