Question

II. Pretend you are an auditor (I know, I know, this is an amazing dream). Imagine that you are performing the 12/31/18 financial statement audit of Curly's Coffee and Vinyl Shop. During the substantive procedures, you discovered the situations listed below. If it is a 2018 error, then you will need to communicate these to the client and request that they be fixed within the 2018 financial records. In that case, write the adjusting journal entry that the client should book to correct. Include date, accounts debited and credited and amounts.

If no adjusting entry is needed, then write: “no adjusting entry necessary” and provide a brief explanation.

1) You tested their 12/31/18 invoices and discovered that one of the credit customers placed an order for 250 Tom Waits albums on 12/31/18, but it was not shipped until 01/02/19. Curly's sold the albums for a total of $5,000 and it cost them $3,500. Curly's uses the perpetual inventory system, so your journal entry will need to correct sales revenue and inventory.

2) You tested their 12/31/18 inventory records and found that it includes a $1,000 item that was purchased with credit on 12/31/18. It was shipped on 12/31/18 but was not received until 1/3/2019. The shipping terms were FOB shipping point and credit terms 2/10, N/30. Curly’s paid their vendor for the invoice on 1/20/2019 with check #189.

3) You tested their repairs and maintenance expense account and found an error. They purchased a fancy new espresso machine on 01/01/2018 (check #74 for $4,000). They mistakenly expensed it (as repairs and maintenance expense) instead of capitalizing. Write the journal entries needed to correct error and properly reflect all 2018 accounting entries that should have been booked related this capitalized asset, which has an expected 5-year useful life and no estimated salvage value.

Answer 1

	Date	Accounts	Debit	Credit
1	12/31/18	Sales revenue	5000
		Accounts receivable		5000
		(To correct sales revenue)
		Inventory	3500
		Cost of goods sold		3500
		(To correct inventory)
2	12/31/18	No adjusting entry necessary
3	12/31/18	Equipment	4000
		Repairs and maintenance expense		4000
		(To rectify capital asset erroneously expensed)
	12/31/18	Depreciation expense ($4000/5 years)	800
		Accumulated depreciation-equipment		800
		(To record depreciation on equipment)

Brief Explanation for #2: Since the terms were FOB shipping point and the goods were shipped on 12/31/18, the same is correctly included in the inventory as the title to the goods has passed to the buyer on shipping. Hence, no adjusting entry is necessary.