Gross Profit
Shelly Corporation is an importer and wholesaler. Its merchandise is purchased from several suppliers and is warehoused by Shelly until sold to consumers. In conducting her audit for the year ended June 30, 2019, the corporation’s CPA determined that the system of internal control was good. Accordingly, she observed the physical inventory at an interim date, May 31, 2019, instead of at year-end.
The CPA obtained the following information from the general ledger:
The CPA’s audit disclosed the following information:
Required:
In audit engagements in which interim physical inventories are observed, a frequently used
- 1. Computation of the gross profit ratio for 11 months ended May 31, 2019
- 2. Computation by the gross profit ratio method of cost of goods sold during June 2019
- 3. Computation by the gross profit ratio method of June 30, 2019 inventory
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Chapter 8 Solutions
Intermediate Accounting: Reporting And Analysis
- You are engaged to perform an audit of the accounts of the Butterfly Corporation for the year endedDecember 31, 2022, and have observed the taking of the physical inventory of the company onDecember 30, 2022. Only merchandise shipped by Butterfly to customers up to and including December30, 2022 have been eliminated from inventory.The inventory as determined by physical inventory count has been recorded on the books by thecompany’s controller. No perpetual inventory records are maintained. All sales are made on an FOBShipping point basis. You are to assume that all purchase invoices have been correctly recorded.The following lists of sales invoices are entered in the sales books for the months of December 2022 andJanuary 2023, respectively. (See attached image)Requirement: Prepare the necessary adjusting journal entries at December 31, 2022.arrow_forwardAssume that in an annual audit of Cullumber Inc. at December 31, 2020, you find the following transactions near the closing date.Assuming that each of the amounts is material, state whether the merchandise should be included in the client’s inventory. 1. A special machine, fabricated to order for a customer, was finished and specifically segregated in the back part of the shipping room on December 31, 2020. The customer was billed on that date and the machine excluded from inventory although it was shipped on January 4, 2021. select an option IncludeDo not include 2. Merchandise costing $3,220 was received on January 3, 2021, and the related purchase invoice recorded January 5. The invoice showed the shipment was made on December 29, 2020, f.o.b. destination. select an option IncludeDo not include 3. A packing case containing a product costing $3,910…arrow_forwardAssume that in an annual audit of Pharoah Inc. at December 31, 2020, you find the following transactions near the closing date.Assuming that each of the amounts is material, state whether the merchandise should be included in the client’s inventory. Transactions 1. A special machine, fabricated to order for a customer, was finished and specifically segregated in the back part of the shipping room on December 31, 2020. The customer was billed on that date and the machine excluded from inventory although it was shipped on January 4, 2021. select an option IncludeDo not include 2. Merchandise costing $5,180 was received on January 3, 2021, and the related purchase invoice recorded January 5. The invoice showed the shipment was made on December 29, 2020, f.o.b. destination. select an option IncludeDo not include 3. A packing case containing a…arrow_forward
- In conducting your audit of Blue Lagoon Corporation, a company engaged in import and wholesale business, for the fiscal year ended June 30, 2021, you determined that its internal control system was good. Accordingly, you observed the physical inventory at an interim date, May 30, 2021 instead of at June 30, 2021. You obtained the following information from the company's general ledger. Sales for eleven months ended May 31, 20121 (before audit adjustments) Sales for the fiscal year ended June 30, 2021 (before audit adjustments) Purchases for eleven months ended May 31, 2021 (before audit adjustments) Purchases for the fiscal year ended June 30, 2021 (before audit adjustments) Inventory, July 1, 2020 Physical inventory, May 30, 2021 P1,615,000 1,843,000 1,296,000 1,536,000 170,200 264,000 Your audit disclosed the following additional information. a. Shipments costing P12,000 were received in May and included in the physical inventory but recorded as June purchases. b. Deposit of P4,000…arrow_forwardYou are engaged to perform an audit of the Nadir Corporation for the year ended December 31, 2021. You have decided to perform the following cutoff test for payables and accruals. Select all items greater than P25,000 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 firm's observation of Nadir's physical inventory you obtained the following cutoff information: the last receiving report number in 2021 was 49745. Your audit work identified the following items for further investigation: Selections from the December 2021 Purchase Journal Vendor Name Date RR# 49472 Amount Explanation P 29,875 Chemicals purchased for manufacturing process. P 45,000 Payment for consulting services for the three-month period beginning December 1, 2021. The P45,000 was charged to consulting expenses. P205,000 Raw materials used in the manufacturing process. 12/30 12/31 Jeff Chemicals None Abed Consulting…arrow_forwardYou have been engaged to audit the financial statements of LUNA Corp for the year ended December 31, 2020. Your audit reveals the following situations: 1. The physical inventory count on December 31, 2020, improperly included merchandise with a cost of P42,500 that had been recorded as a sale on December 29, 2020 and held for the customer to pick up on January 2, 2021. 2. In 2020, BSA sold for P18,500 fully depreciated equipment that originally cost P110,000. The proceeds from the sale were credited to the Equipment account. 3. BSA has a portfolio of current marketable equity securities acquired in 2019 for trading purposes. No valuation entry has been made. Information on cost and market value is as follows: Cost Market December 31, 2019 P 475,000 P 475,000 December 31, 2020…arrow_forward
- Which of the following is an internal control measure regarding purchases made by a company during a fiscal year? a. The person authorizing purchase orders is the person filling purchase requisitions. b. Payment to creditors is authorized only after the purchase invoice data is verified against the receiving report and purchase order. c. The person authorizing payment is the person writing the payment checks. d. Payment to creditors is authorized only after the purchase invoice data is verified against the inventory levels existing on the ☐ date of the payment.arrow_forwardHaving been engaged as external auditor of Duhat Company on February 28, 2019, you were unable to observe the taking of inventory on December 31, 2019, which was reported to amount to P360,000. The following data, however, were gathered by you: Inventory, December 31, 2019 P 320,000 Purchases during 2019 P 1,410,000 Cash sales during 2019 P 350,000 Shipment received on December 26, 2019, included physical inventory but, not recorded as purchases P 10,000 Deposits made with suppliers, entered as purchases, goods were not received in 2019 P 20,000 Collections on accounts receivable, 2019 P 1,800,000 Accounts Receivable, January 1, 2019 P 250,000 Accounts Receivable, December 31, 2019 P 300,000 Gross Profit percentage on sales 40% Determine how much is the estimated inventory shortage at December 31, 2019arrow_forwardHaving been engaged as external auditor of Duhat Company on February 28, 2019, you were unable to observe the taking of inventory on December 31, 2019, which was reported to amount to P360,000. The following data, however, were gathered by you: Inventory, December 31, 2018 - P320.00 Purchases during 2019 - P1,410,000 Cash sales during 2019 - P350.00 Shipment received on December 26, 2019, included physical inventory but, not recordeds as purchases - P10,000 Deposits made with suppliers, entered as purchases, goods were not received in 2019 - P20,000 Collections on accounts receivable, 2019 - P1,800,000 Accounts Receivable, January 1, 2019 - P250,000 Accounts Receivable, December 31, 2019 - P300,000 Gross Profit percentage on sales - 40% Determine how much is the estimated inventory shortage at December 31, 2019.arrow_forward
- Assume that in an annual audit of Wildhorse Inc. at December 31, 2025, you find the following transactions near the closing date. Assuming that each of the amounts is material, state whether the merchandise should be included in the client's inventory. 1. 2. 3. 4. 5. Transactions A special machine, fabricated to order for a customer, was finished and specifically segregated in the back part of the shipping room on December 31, 2025. The customer was billed on that date and the machine excluded from inventory although it was shipped on January 4, 2026. Merchandise costing $5,880 was received on January 3, 2026, and the related purchase invoice recorded January 5. The invoice showed the shipment was made on December 29, 2025, f.o.b. destination. A packing case containing a product costing $7,140 was standing in the shipping room when the physical inventory was taken. It was not included in the inventory because it was marked "Hold for shipping instructions." Your investigation revealed…arrow_forwardReggie Company has just completed a physical inventory count at year-end, December 31, 2020. Only the items on the shelves, in storage, and in the receiving area were counted and costed on a FIFO basis. The inventory amounted to $65,000. During the audit, the auditor developed the following additional information: a. Goods costing $750 were being used by a customer on a trial basis and were excluded from the inventory count at December 31, 2020. b. Goods costing $900 were in transit to Reggie on December 31, 2020, with terms F.O.B. destination (explained below). Because these goods had not arrived, they were excluded from the physical inventory count. c. On December 31, 2020, goods in transit to customers, with terms F.O.B. shipping point, amounted to $1,300 (the expected delivery date was January 10, 2021), Because the goods had been shipped, they were excluded from the physical inventory count. d. On December 28, 2020, a customer purchased goods for $2,650 cash and left them "for…arrow_forwardA purchases cut-off procedure was rendered by your audit staff in line with your audit of the financial statements of Friday Corp. for the period ended December 31, 2021. Inventories were physically counted on December 29 as a result, all goods received on or before December 29 has been included in the physical count which amounted to P449,000. Purchases and Accounts Payable balances per books were at P2,895,000 and P578,000, respectively. Receiving Report No. Receipt Date Invoice Price Remarks 816913 Dec. 28 10,600 Received on consignment basis 816914 Dec. 29 13,600 FOB Destination 816915 Dec. 30 15,000 FOB Shipping Point 816917 Dec, 31 10,800 FOB Shipping Point 816918 Dec. 31 7,200 Free Alongside the Vessel 816919 Dec. 31 14,500 FOB Destination 816920 Jan. 2 8,200 FOB Shipping Point 816921 Jan. 2 9,600 FOB Seller (In-transit) 816922 Jan. 2 9,100…arrow_forward
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