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Assignment4 - ——‘ Assignment#4 — SOLUTION 3 39...

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Unformatted text preview: ——‘ Assignment #4 — SOLUTION 3 - 39 ASSIGNMENT #4 — INVENTORY OF NEWSPRINT, NEWSPRINT CONSUMPTION AND PUBLICATION SALES COMMENTS TO THE INSTRUCTOR This assignment requires the audit of newsprint inventory, (observation, clerical accuracy, and valuation), the cost of newsprint consumed, the estimated value of newsprint lost by fire, and a reasonableness test (analytical procedure) of revenue fiom newspaper sales. The adjusting entry normally resulting from this assignment is as follows: (8) 811 Newsprint and ink 1,127 131 Inventory 1,127 To correct footing & extension errors, per C-la (9) 811 Newsprint and Ink 12,716 131 Inventory 12,716 To reduce inventory to net realizable value, per C-1 (10) 421 Vouchers Payable 10,480 131 Inventory 10,480 To remove 20x3 newsprint purchase, per C-1 (11) 125 Receivable - insurance claim 25,950 811 Newsprint and ink 25,950 To record receivable for insurance claim, per C-3 INVENTORY. The inventory assignment involves the physical count and the pricing, extension and footing to the general ledger balance. Physical Inventory Memo. The Physical Inventory was observed on December 31St and the count recorded on Schedule C-2. The student is required to write a memo covering the Physical Count. Be sure Memo covering the Physical Inventory is dated close to the year end and does not include information that could not have been know at December 315‘, such as the amount of write off for Obsolete Inventory. However, there is Yellow paper that has been on hand from the previous year and the student should note in the Memo that Yellow paper is obsolete and perhaps some adjustment seems needed. Pricing, Extension and Footing errors. AJE #8 records in a single entry the net of a footing, an extension and a pricing error. This offers the opportunity to discuss that clerical errors are not infrequent. If you want students to consider materiality, the entire entry of $1,127 could be passed. The author’s believes it is a little high to pass. Individual components should NOT be passed. The amounts go in both directions and therefore only the net amount should be passed or adjusted. Since there is no evidence to the contrary, the differences appear to fi' i 3 - 40 Assignment #4 — SOLUTION be innocent errors and not intentional irregularities. The errors do indicate some sloppy work by the client. Students may comment on this. For the pricing error, some students may omit Voucher No 1 1-06, the freight for the purchase for Voucher No. 11-05. The resulting price is totally out of line with all other prices for paper. This gives you an opportunity to emphasize the importance of looking at results to make sure the data provide results that are reasonable. Newsprint Purchases. Schedule C-lb, a list of newsprint purchases for the year, is an illustration of the use of a client schedule in the audit process. It is used to assist in the test of pricing. Audit procedures are performed in order to validate the reliability of the schedule. Obsolete Inventory. AJE #9 gives recognition to obsolete inventory. The assignment offers the opportunity to discuss criteria for discovery and adjustment of obsolete inventory. The obsolete inventory (yellow) newsprint is identified by comparing the current year’s inventory with that of the prior year. This confirms the need for some write-down. The amount of write-down determined from the subsequent disposal of the inventory, recorded in 20x3 on Voucher No 1-1. The justification for this write-down should be documented in the workpapers or in the memo. In Transit Inventory. AJE #10 resulted fi'om client incorrectly recording a purchase in-transit in 20x2, that was properly a purchase in the 20x3. This AJE may have been prepared in Assignment #1. In work on Assignment #7 regarding search for unrecorded liabilities, G-2, an additional AJE is made for inventory in-transit. This A] E will have no effect on Assignment #4. The search in Assignment #7 will complete the effort for a proper cut-off for inventory. NEWSPRINT CONSUMED Estimating Newsprint and Ink. An amount of 1.5% of newsprint consumed is provided for ink. In estimating the amount per books and per adjusted, the computation should be based on the newsprint consumed after all adjusting entries have been considered and the same amount should be used for both the unadjusted and adjusted columns. Students sometimes have difficulty with this concept. FIRE LOSS. AJE #11 records the estimated loss of newsprint from a fire. NOTE: To simplify the assignment for newsprint consumed, you can give the students the tonnage and dollar amounts for the insurance claim and not require that they compute the details. Computing the estimated loss in this situation is not much different from the typical textbook procedure for estimating inventory loss from a fire in a mercantile business. In a merchandising business, the combined cost of goods sold and a shortage for any reason is known by physical count. The amount of inventory sold can be estimated by historical gross profit percentage and is subtracted from the combined total above to arrive at the total shortage. For Valley Publishing the total shortage is attributed to the fire loss. As illustrated in the author’s solution on C-3, the student should attempt to determine the amount of newsprint that should have been consumed to print the newspaper for the year based upon a known circulation and average weight of each issue. The estimate of newsprint consumed in the printing process is subtracted from the total newsprint available for use to determine an estimate of the newsprint loss by fire. While individual solutions may vary, the approach should be similar to the solution on G3 and C-3a. The amount of the loss can be corroborated by relating the loss to a specific purchase. it. wk j Assignment #4 — SOLUTION 3 - 41 The fire loss can be accounted for as a receivable or an expense. The students should be required to justify the choice. The justification should include some estimate of the probability of collection from the insurance company. The facts in the case seem to warrant accounting for the loss as a receivable, which is the author’s solution. However, an alternative interpretation of the facts is reasonable. Since the auditor’s computations will be used to assist the client in their insurance claim, the issue of independence might be raised. Is the auditor influenced in the accounting for the financial statements because he-she made the computation to help the client with the claim? Freight Charge, misclassified. A voucher supporting inventory purchases, Voucher No 10-04 ($18,760), is freight for a new printing press. This error may come to the attention of the students as follows: 1. Some students will have recognized the error in Assignment #1. If so, an adjusting entry was prepared at that time. The amount for the entry should be entered on Schedule C-3. This is the author’s solution. 2. Some students will fail to notice the item at all and, therefore, do nothing at this time. These students will, however, have another opportunity to find the item in connection with the fixed asset caption (Assignment #6). At that time, they might be chided for their failure to take note of the matter in Assignment #4. 3. In perfomiing this assignment, some students may recognize a possible error in reviewing the list of “Inventory Purchases," Schedule C-lb, check ahead to future assignments for additional facts, and make the required adjusting entry at this time. Some of these students will want to credit Acct 131, Newsprint Inventory. Point out that Newsprint Inventory has been adjusted for the physical count and that a credit to inventory would incorrectly reduce the quantity on hand. An entry prepared in Assignment #4 should be as follows: (1) 330 Printing Equipment 18,760 811 Newsprint consumed 18,760 To capitalize freight on new printing equipment, per T—2 PUBLICATION SALES is tested by Analytical Procedures using information in the ABC (Audit Bureau of Circulation) report. In prior years the ABC report was tested for reliability. Because of the fire loss the ABC report cannot be tested in the current year. See discussion in the Audit Memo covering Inventory. Circular Reasoning. Many students will try to compute circulation on Schedule C-4, Publication Sales, in order to test the ABC report.. This circular reasoning example is illustrated on page 3-49a in this Instructor ’s Manual. They use the tons computed on C-3a to calculate circulation. Students do this because it was done last year and is required in the audit program. They overlook the statement on page 1-1 7, ". . . due to the fire loss, . . . corroboration is not practical, ” and do not realize the flaw in their logic. When students do this, you have an excellent opportunity to illustrate circular reasoning. The ABC report is used to estimate circulation on C-3a, and the circulation computed is used to test circulation on the ABC report on C-4. Ht 1 3 - 42 Assignment #4 — SOLUTION ClMemo VALLEY PUBLISHING COMPANY 12l31l20x2 NEWSPRINT INVENTORY, NEWSPRINT CONSUMED AND PUBLICATION SALES MEMO I performed the audit of Newsprint Inventory, Newsprint Consumed and Publication Sales for Valley Publishing Company in accordance with the Audit Program, except as noted below, which complied with Generally Accepted Auditing Standards. The audit included observation of newsprint inventory (covered in a separate memo), tests of pricing and extensions, review for obsolescence, tests of newsprint consumed and publication sales. I tested Valley’s schedule of Inventory Purchases to validate the schedule for use in the test of pricing. A fire loss occurred. Because of the fire loss I could not test the Audit Bureau of Circulation (ABC) reported circulation amount. Since ABC is an independent source and the report has proved reliable in the past, we relied upon their amount for the current year’s audit. Using the ABC reported circulation, I estimated the amount of a fire loss. My computations will provide assistance to Valley in filing their insurance claim. I believe the audit provides a reasonable basis for our opinion. THE FOLLOWING ITEMS WERE NOTED: 1) Tests of quantities, price and extension resulted in a $1,127 difference, which was adjusted. 2) Yellow newsprint on hand since 20x1 and sold for $1,000 in 20x3, was obsolete and written down to salvage value. The write-down was for $12,716. All other newsprint inventory is current and is considered usable. 3) The fire noted above, included one carload of paper burning. The estimate of the loss in the amount, $25,950, was charged to accounts receivable. The computations and accounting for this event are more fully discussed on Schedule C-3a. 4) The reasonableness tests for newsprint consumed and publication sales resulted in difl'erences which were considered to be insignificant. CONCLUSION: After the adjustments proposed, it is my opinion that the newsprint inventory, inventory consumed and publication sales balances are fairly stated in accordance with generally accepted accounting principles. Rofim‘ Bron/I1 1-2l-x3 1 Assignment #4 — SOLUTION X1 x3 x4 x5 VALLEY PUBLISHING COMPANY #131 - Inventory 12/31/20x2 3-43 [Prepared by client] 1/20/X3 NUMBER TOTAL PER TON ITEM ROLLS TONS COST AMOUNT Newsprint - yellow: 34" 600 lbs. each 90 27 q 508 X4 13,716 * Newsprint - pink: 17" 300 lbs. each 60 9 q 523 p 4,707 * Newsprint - glossy: 34" 600 lbs. each 70 21 q 565 p 11,676 * X2 17" 300 lbs. each 7 1 q 565 p 565 * Newsprint - white: 34" 600 lbs. each 777 233 q 521 pX3 121,393 * 17" 300 lbs. each 313 47 q 521 p 24,485 * Y Total Inventory 338 177,542 T X1 In transit - pink: 17" 300 lbs. each 133 20 524 X5 10,480 * 358 188,022 TB/1 T AJE 8, C-1a (1,127) AJE 9,C-1a (12,716) AJE 10, C-1a (10,480) 163,699 AJE 20, 6—2 26,000 ADJUSTED BALANCE 189,699 T Footings checked Extensions checked. FIFO pricing traced to voucher listing, C-1b and vouchers, includes frei-ht Quantities traced to invento observation, C-2. Extension error, $20, insi- nificant Footin error, $1,000. Included in AJE 8, C-1a. Extension error, $ 189 . AJE 8, C-1a. FIFO pricing error, white 34", $316. AJE 8, C-1a. Same as previous year-old paoer. Exchanoed for $1,000, 1/2/x3, Voucher 1-1. AJE 9, C-1a. Traced to Voucher 12-33 for $10,480 FOB Center City. Received 1/2/x2. NOT pro-erl an in-transit item. AJE 10, C-1a. IL. W 3 — 44 Assignment #4 — SOLUTION VALLEY PUBLISHING COMPANY #131 - Inventory / Adjusting Entries RB 12/31/20x2 1/20/X3 DEBIT CREDIT AJE (8) —-—- ---------------------------------- 811 Newsprint and Ink 1,127 131 Inventory (1,127) Footing, extension and pricing errors, per C-1. SUMMARY OF FOOTING, PRICING and EXTENSION ERRORS. X1 Footing (C-1) (1,000) X2 Extension (0-1) 11,676 Should be 11,865 189 T X3 Pricing (C—1) VOUCHER TOTAL TONS TON/COST AMOUNT 12—05 75 521 39,075 * 11-05,06 135 519 70,065 * 9-19 23 519 11,937 * Computed 233 T 519.64 * 121,077 T Per above (C-1) 233 521.00 121,393 Difference, adjustment 233 1.36 (316) T * TOTAL AMOUNT TO INVENTORY, AJE 8 above 1,127 T AJE(9) 811 Newsprint and Ink 131 Inventory (12,716) To reduce obsolete inventory to net realizable value, per C-1. AJE(10) 421 Vouchers Payable 10,480 131 Inventory (10,480) To remove from inventory a newsprint purchase that should be in 20x3, per C-1. T Footed or Cross footed * Multiplied or Divided fl L Assignment #4 — SOLUTION 3 - 45 SECTION 2 - Exhibit 13 Voucher Register Supplement - Inventory Purchases VALLEY PUBLISHING COMPANY Inventory Purchases Year Ended December 31, 20x2 | l VOUCHER | | PRICE NUMBER V E N D O R TONS | AMOUNT | DESCRIPTION PER TON .------.-. ..--..--...--..-..---..........--......._._.. ._.__-- I -_.__-____ l ... ................ ... ......... 1-05 National Newsprint Corporation 60 | 30,900 | White 34" 515 1-11 National Newsprint Corporation 20 | 10,360 | Pink 17" 518 1-13 National Newsprint Corporation 45 | 23,220 | White 17" 516 2-06 Canadian Paper, Ltd. 160 | 74,240 | White 34" v 464 2-08 Motor Carrier Corp. | 8,320 | 52 2-13 National Newsprint Corporation 25 | 14,050 | Glossy 34" 562 3-17 National Newsprint Corporation 60 | 30,960 | White 34" 516 3—21 National Newsprint Corporation 5 | 2,815 | Green 17" 563 4-02 National Newsprint Corporation 40 | 20,680 | White 17” 517 4-16 National Newsprint Corporation 55 | 28,435 | White 34" v 517 5-04 Canadian Paper, Ltd. 145 | 67,425 | White 34" 465 5—05 Motor Carrier Corp. | 7,395 | 51 6—03 Canadian Paper, Ltd. 55 | 25,575 | White 17" 465 6-11 Motor Carrier Corp. | 2,805 | 51 ' 7-04 National Newsprint Corporation 45 | 23,310 | White 34" 518 7-26 National Newsprint Corporation 25 | 13,075 | Pink 17" 523 8-22 National Newsprint Corporation 50 | 25,950 | White 34" 519 9-19 National Newsprint Corporation 75 | 38,925 | White 34" v 519 10-04 Illinois Eastern Transport | 18,760 | 10-10 NationaI Newsprint Corporation 26 | 14,690 | Glossy 34" 565 1 1-01 National Newsprint Corporation 4 | 2,260 | Glossy 17" 565 11-05 Canadian Paper, Ltd. 135 | 63,045 | White 34" v 467 1 1 -06 Motor Carrier Corp. | 7,020 | 52 11-24 National Newsprint Corporation 40 | 20,800 | White 17" 520 12-05 National Newsprint Corporation 75 | 39,075 | White 34" 521 12-19 National Newsprint Corporation 25 | 13,025 | White 17" 521 12-33 National Newsprint Corporation 20 | 10,480 | Pink 17" 524 1,190 637,595 X $535.79 * T ——T _ * Computed T Footcd V 77mm to voucher registcr. All infirmation ”gags with the Voucher. X Trace total to the Voucher rtgzister. 3 — 46 Assignment #4 —— SOLUTION VALLEY PUBLISHING COMPANY #131 - Inventory Observation 12/31/20x2 12/31/x2 NUMBER WEIGHT (X) TOTAL ITEM COUNTED ROLLS EA. ROLL TONS Newsprint - white 34” 777 600 233 q Newsprint — white 17" 313 300 47 q Newsprint — yellow 34" 90 600 27 q Newsprint - glossy 34" 70 600 21 q Newsprint - glossy 17" 7 300 1 q Newsprint - pink 17" 30 600 9 q NOTE: Inventory observed after press-run on Wednesday, December 31, 20x2 -- 100% test count. (X) Actual manufacturers' weights stamped on unopened rolls. q Descriptions & quantities traced to final priced inventory, C-1. RB [/20/X3 INVENTORY CUT-OFF DATA (w) Last receiving information was dated December 15, 20x2, for 167 rolls of 17" white newsprint from National Newsprint Corporation. w Traced to Voucher12-19. Received12-15. Properly included as a 20x2 purchase. R B I/ZO/X3 Assignment #4 —— SOLUTION 3 - 47 VALLEY PUBLISHING COMPANY #811 - Newsprint and Ink 12/31/20x2 T O N S D O L L A R S DESCRIPTION Books Adjusted Books Adjusted Beginning Inventory 340 340 175,856 175,856 v Purchases 1190 1,190 637,595 637,595 w AJE 1, T-3 (18,760) AJE 10, C-1a (20) (10,480) Available for sale 1,530 1,510 813,451 784,211 Ending Inventory (358) (358) (188,022) (188,022) C-1 AJE 8,C-1a 1,127 AJE 9, C-1a 12,716 AJE 10, C-1a 20 10,480 (358) (338) (188,022) (163,699) C-1 Inventory consumed and burned 1,172 1,172 625,429 620,512 T T T T UANTITY CONSUMED: TOTAL TONS CONSUMED [—2,000] C-3a 1,121 C-3a FIRE LOSS: COMPUTED TONS lost in the fire 51 T Price per ton [per Voucher 8-22] 519 Computed Fire Loss amount 26,469 Amount per Voucher 8-22, 50 tons, AJE 11, 0-33. ACCT 125 - Accounts Receivable-Insurance Claim 25,950 (25,950) X Difference - very small, [1 ton unaccounted for]. 519 Total Consumed T 625,429 594,562 1.5% of ADJUSTED cost of ink 8,918 8,918 COMPUTED NEWSPRINT AND INK 634,347 603,480 Difference [books to computed], not material (450) (450) 633,897 TB 603,030 T T T Footed v Per orior ears work - . - rs w Per voucher re- ister Audit tests . - rformed, Test of Transactions, T-1 & C-1 b X Pa-er burned. pn'maril one car, er A. Duncan, AJE 11, C—3a. Amount Soecificall attributable to fire loss, ner Voucher 8-22. See C-3a for further exlanation. 3 — 48 Assignment #4 — SOLUTION VALLEY PUBLISHING COMPANY #811 - Computaton of Quantity Consumed 12/31/20x2 QUANTITY CONSUMED: Issues this year 313 2 Weight per issue (lbs) 0.5020 u 157.13 * ABC paid circulation (C-4) 13,340 y Plus estimated loss 7% 934 y Number of papers consumed 14,274 T Total weight consumed (lbs) 2,242,874 * lbs per ton divided by 2,000 TOTAL TONS CONSUMED to C-3 1,121 * AJE (11) 125 Receivable -- Insurance Claim 25,950 811 Newsprint and Ink To record insurance claim for estimated fire loss, per C-3 and below. Per wei o ht test Per ABC reoort and indust amounts Per C-4 Com o uted FIRE LOSS The amount for the fire loss is recomized as a receivable since oa ment seems hio hI orobable. The insurance com oan has acknowledo ed the loss and reo uired some evidence of the amount. The ouanti is SUo oorted b an indeoendent com-utation and an actual invoice. The ooaer lost is reasonabl related to the ooaer received er the actual invoice. The invoice should orovide the basis for the orice of the ooaeri Therefore, the claim is 'ustified and should be oaid. SEE C-3 for com outation and AJE 11 above. RB % a (25,950) Assignment #4 — SOLUTION VALLEY PUBLISHING COMPANY #721 - Publication Sales 12l31/20x2 Estimated DESCRIPTION Subscription ABC repOIted paid circulation 9,605 w Multiplied by subscription rate per year of $72 72.00 y Average single copy price [$0.18 to newsstand x 313 issues = 56.34) Approximate revenue from publication sales 691,560 u Balance per general ledger, 12l31/x1 E<c—| Footin-s or crossfootin- s checked Com . utation checked Checked ABC reoort Per reorted subscri -tions in circulation de-artment Per oublished rate schedule & oermanent file descri -ton. Estimated Newsrack 3,735 T 56.34 y 210,430 u Total Circulation 13,340 v 901,990 T (640) 901,350 TB-3 T 3-49a ILLUSTRATION OF CIRCULAR REASONING QUANTITY CONSUMED: Issues this year Weight per issue (lbs) ABC paid circulation (C-4y) Plus estimated loss 7% Number of papers consumed Total weight consumed (lbs) lbs per ton TOTAL TONS CONSUMED to C-3 TEST OF ABC REPORTED PA...
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