Slide 1

Review of Chapters 6-9

Accounting Principles, Ninth Edition

Slide 2

Linden Watch Company reported the following income statement data for a 2-year period.

2010 2011 Sales $260,000 $320,000Cost of goods soldBeginning inventory 32,000 44,000Cost of goods purchased 193,000 225,000Cost of goods available for sale 225,000 269,000Ending inventory 44,000 52,000Cost of goods sold 181,000 217,000Gross profit $ 79,000 $103,000

Linden uses a periodic inventory system. The inventories at January 1, 2010, and December 31, 2011, are correct. However, the ending inventory at December 31, 2010, was overstated $3,000.Instructions(a) Prepare correct income statement data for the 2 years.(b) What is the cumulative effect of the inventory error on total gross profit for the 2 years?

Problem #1

Slide 3

(a)2010 2011

Sales $260,000 $320,000Cost of goods soldBeginning inventory 32,000 41,000**Cost of goods purchased 193,000 225,000Cost of goods available for sale 225,000 266,000Ending inventory ($44,000 – $3,000) * 41,000 52,000Cost of goods sold 184,000 214,000Gross profit $ 76,000*** $106,000****

* Overstated by $3,000** The beginning inventory in 2011 equals the ending inventory in 2010. It is being OVERSTATED by $3,000*** Net income is $3,000 less because we OVERSTATED our ending inventory. We really have $3,000 LESS inventory than we thought we had.**** The $3,000 error automatically corrects itself in 2011. the net effect over two years is $0.

Solution #1

Slide 4

Problem & Solution #2

Events

Items

Assets Owner’s

Equity

Cost of

Goods

Sold

Net

Income

1. A physical count of goods on hand at the end of the current

year resulted in some goods being counted twice.

Events

Items

Assets Owner’s

Equity

Cost of

Goods

Sold

Net

Income

1. A physical count of goods on hand at the end of the current

year resulted in some goods being counted twice. O O U O

Slide 5

Problem & Solution #2

Events

Items

Assets Owner’s

Equity

Cost of

Goods

Sold

Net

Income

2. The ending inventory in the previous period was overstated.

Events

Items

Assets Owner’s

Equity

Cost of

Goods

Sold

Net

Income

2. The ending inventory in the previous period was overstated. NA NA O U

Slide 6

Problem & Solution #2

Events

Items

Assets Owner’s

Equity

Cost of

Goods

Sold

Net

Income

3. Goods purchased on account in December of the current

year and shipped FOB shipping point were recorded as

purchases, but were not included in the count of goods on hand

on December 31 because they had not arrived by December

31.

Events

Items

Assets Owner’s

Equity

Cost of

Goods

Sold

Net

Income

3. Goods purchased on account in December of the current

year and shipped FOB shipping point were recorded as

purchases, but were not included in the count of goods on hand

on December 31 because they had not arrived by December

31.

U U O U

Slide 7

Problem & Solution #2

Events

Items

Assets Owner’s

Equity

Cost of

Goods

Sold

Net

Income

4. The internal auditors discovered that the ending inventory in

the previous period was understated $15,000 and that the

ending inventory in the current period was overstated $25,000.

1. End Inv (prev) UNDERSTATED = Beg Inv (cur) UNDERSTATED

2. Beg Inv (cur) is UNDERSTATED by $15,000 BUT End Inv (cur) is OVERSTATED by $25,000

3. COG = Beg Inv (cur) + Purch – End Inv (cur) +$15,000 -$25,000

4. Net Effect = COG UNDERSTATED by $10,000….. A, OE, NI OVERSTATED by $10,000

Events

Items

Assets Owner’s

Equity

Cost of

Goods

Sold

Net

Income

4. The internal auditors discovered that the ending inventory in

the previous period was understated $15,000 and that the

ending inventory in the current period was overstated $25,000.O O U O

Slide 8

Below are some typical transactions incurred by Farley Company.____1. Purchase of merchandise on account.____2. Collection on account from customers.____3. Payment of employee's wages.____4. Sales of merchandise for cash.____5. Close Income Summary to owner's capital.____6. Adjusting entry for depreciation on machinery.____7. Payment of creditors on account.____8. Purchase of office equipment on credit.____9. Sales discount taken on goods sold on credit.____10. Sales of merchandise on account.____11. Purchase of a delivery truck for cash.____12. Return of merchandise purchased on credit.____13. Payment of rent in advance.____14. Adjusting entry for accrued interest expense.____15. Purchase of office supplies for cash.

For each transaction, indicate by the code letter the appropriate journal where the transaction would be journalized.

CR—Cash Receipts JournalCP—Cash Payments JournalS—Sales JournalP—Single-Column Purchases JournalG—General Journal

Problem & Solution #3

PCRCPCR

GGCPG

S

G

G

CR

CP

CP

CP

Slide 9

Listed below are seven errors or problems which might occur in the processing of cash transactions. Also shown is a list of internal control principles. Evaluate each possible error and cite a principle that is listed that would reduce the probability of the error occurring. If none of the principles given will correct the problem, write "None." If you think more than one principle is appropriate, list all principles that apply.

Possible Errors or Problems1. An employee steals the cash collected from a customer for an account receivable and conceals this theft by issuing a credit memorandum indicating that the customer returned the merchandise.

Internal Control Principlesa. Establishment of responsibility

b. Segregation of duties

c. Physical controls

d. Documentation procedures

e. Independent internal verification

f. Human resource controls

Problem & Solution #4

Slide 10

Listed below are seven errors or problems which might occur in the processing of cash transactions. Also shown is a list of internal control principles. Evaluate each possible error and cite a principle that is listed that would reduce the probability of the error occurring. If none of the principles given will correct the problem, write "None." If you think more than one principle is appropriate, list all principles that apply.

Possible Errors or Problems2. A small fire destroys 3 days of cash receipts.

Internal Control Principlesa. Establishment of responsibility

b. Segregation of duties

c. Physical controls

d. Documentation procedures

e. Independent internal verification

f. Human resource controls

Problem & Solution #4

Slide 11

Listed below are seven errors or problems which might occur in the processing of cash transactions. Also shown is a list of internal control principles. Evaluate each possible error and cite a principle that is listed that would reduce the probability of the error occurring. If none of the principles given will correct the problem, write "None." If you think more than one principle is appropriate, list all principles that apply.

Possible Errors or Problems3. The official designated to sign checks is able to steal blank checks and issue them without fear of detection.

Internal Control Principlesa. Establishment of responsibility

b. Segregation of duties

c. Physical controls

d. Documentation procedures

e. Independent internal verification

f. Human resource controls

Problem & Solution #4

Slide 12

Listed below are seven errors or problems which might occur in the processing of cash transactions. Also shown is a list of internal control principles. Evaluate each possible error and cite a principle that is listed that would reduce the probability of the error occurring. If none of the principles given will correct the problem, write "None." If you think more than one principle is appropriate, list all principles that apply.

Possible Errors or Problems4. A salesclerk in serving customers often rings up a sale for less than the actual amount and then keeps the additional cash collected from the customer.

Internal Control Principlesa. Establishment of responsibility

b. Segregation of duties

c. Physical controls

d. Documentation procedures

e. Independent internal verification

f. Human resource controls

Problem & Solution #4

Slide 13

Listed below are seven errors or problems which might occur in the processing of cash transactions. Also shown is a list of internal control principles. Evaluate each possible error and cite a principle that is listed that would reduce the probability of the error occurring. If none of the principles given will correct the problem, write "None." If you think more than one principle is appropriate, list all principles that apply.

Possible Errors or Problems5. Three cashiers use one cash register drawer and the cash in the drawer is often short of the balance kept on hand.

Internal Control Principlesa. Establishment of responsibility

b. Segregation of duties

c. Physical controls

d. Documentation procedures

e. Independent internal verification

f. Human resource controls

Problem & Solution #4

Slide 14

Listed below are seven errors or problems which might occur in the processing of cash transactions. Also shown is a list of internal control principles. Evaluate each possible error and cite a principle that is listed that would reduce the probability of the error occurring. If none of the principles given will correct the problem, write "None." If you think more than one principle is appropriate, list all principles that apply.

Possible Errors or Problems6. Each cashier counts his own register drawer each day and verbally reports the results to the supervisor.

Internal Control Principlesa. Establishment of responsibility

b. Segregation of duties

c. Physical controls

d. Documentation procedures

e. Independent internal verification

f. Human resource controls

Problem & Solution #4

Slide 15

Listed below are seven errors or problems which might occur in the processing of cash transactions. Also shown is a list of internal control principles. Evaluate each possible error and cite a principle that is listed that would reduce the probability of the error occurring. If none of the principles given will correct the problem, write "None." If you think more than one principle is appropriate, list all principles that apply.

Possible Errors or Problems7. Cashiers with over 5 years’ experience are not bonded.

Internal Control Principlesa. Establishment of responsibility

b. Segregation of duties

c. Physical controls

d. Documentation procedures

e. Independent internal verification

f. Human resource controls

Problem & Solution #4

Slide 16

Coffeldt Sign Company uses the allowance method in accounting for uncollectible accounts. Past experience indicates that 1% of net credit sales will eventually be uncollectible. Selected account balances at December 31, 2009, and December 31, 2010, appear below:

12/31/09 12/31/10Net Credit Sales $400,000 $500,000Accounts Receivable 75,000 100,000Allowance for Doubtful Accounts 5,000 ?Instructions(a) Record the following events in 2010.

Aug. 10 Determined that the account of Sue Lang for $1,000 is uncollectible.

Allowance for Doubtful Accounts 1,000Accounts Receivable—Sue Lang 1,000

(To write off Sue Lang account)

Problem & Solution #5

Slide 17

Coffeldt Sign Company uses the allowance method in accounting for uncollectible accounts. Past experience indicates that 1% of net credit sales will eventually be uncollectible. Selected account balances at December 31, 2009, and December 31, 2010, appear below:

12/31/09 12/31/10Net Credit Sales $400,000 $500,000Accounts Receivable 75,000 100,000Allowance for Doubtful Accounts 5,000 ?Instructions(a) Record the following events in 2010.

Sept. 12 Determined that the account of Tom Woods for $4,000 is uncollectible.

Allowance for Doubtful Accounts 4,000Accounts Receivable—Tom Woods 4,000

(To write off Tom Woods account)

Problem & Solution #5

Slide 18

Coffeldt Sign Company uses the allowance method in accounting for uncollectible accounts. Past experience indicates that 1% of net credit sales will eventually be uncollectible. Selected account balances at December 31, 2009, and December 31, 2010, appear below:

12/31/09 12/31/10Net Credit Sales $400,000 $500,000Accounts Receivable 75,000 100,000Allowance for Doubtful Accounts 5,000 ?Instructions(a) Record the following events in 2010.

Oct. 10 Received a check for $550 as payment on account from Sue Lang, whose account had previously been written off as uncollectible. She indicated the remainder of her account would be paid in November.

Accounts Receivable— Sue Lang 1,000Allowance for Doubtful Accounts 1,000

(To reinstate Sue Lang account previously written off)

Cash 550Accounts Receivable— Sue Lang 550

(To record collection on account)

Problem & Solution #5

Slide 19

Coffeldt Sign Company uses the allowance method in accounting for uncollectible accounts. Past experience indicates that 1% of net credit sales will eventually be uncollectible. Selected account balances at December 31, 2009, and December 31, 2010, appear below:

12/31/09 12/31/10Net Credit Sales $400,000 $500,000Accounts Receivable 75,000 100,000Allowance for Doubtful Accounts 5,000 ?Instructions(a) Record the following events in 2010.

Nov. 15 Received a check for $450 from Sue Lang as payment on her account.

Cash 450Accounts Receivable— Sue Lang 450

(To record collection on account)

Problem & Solution #5

Slide 20

Coffeldt Sign Company uses the allowance method in accounting for uncollectible accounts. Past experience indicates that 1% of net credit sales will eventually be uncollectible. Selected account balances at December 31, 2009, and December 31, 2010, appear below:

12/31/09 12/31/10Net Credit Sales $400,000 $500,000Accounts Receivable 75,000 100,000Allowance for Doubtful Accounts 5,000 ?Instructions(b) Prepare the adjusting journal entry to record the bad debt provision for the year ended December 31, 2010.

Bad Debts Expense ($500,000 × 1%) 5,000Allowance for Doubtful Accounts 5,000

(To record estimate of uncollectible accounts)

Problem & Solution #5

Slide 21

Coffeldt Sign Company uses the allowance method in accounting for uncollectible accounts. Past experience indicates that 1% of net credit sales will eventually be uncollectible. Selected account balances at December 31, 2009, and December 31, 2010, appear below:

12/31/09 12/31/10

Net Credit Sales $400,000 $500,000

Accounts Receivable 75,000 100,000

Allowance for Doubtful Accounts 5,000 ?

Instructions

(c) What is the balance of Allowance for Doubtful Accounts at December 31, 2010?

Balance of Allowance for Doubtful Accounts at December 31, 2010, is $6,000 ($5,000 – $1,000 – $4,000 + $1,000 + $5,000).

Problem & Solution #5

Slide 22

Copyright © 2009 John Wiley & Sons, Inc. All rights reserved.

Reproduction or translation of this work beyond that permitted

in Section 117 of the 1976 United States Copyright Act without

the express written permission of the copyright owner is

unlawful. Request for further information should be addressed

to the Permissions Department, John Wiley & Sons, Inc. The

purchaser may make back-up copies for his/her own use only

and not for distribution or resale. The Publisher assumes no

responsibility for errors, omissions, or damages, caused by the

use of these programs or from the use of the information

contained herein.

Copyright