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Exhibit B: Notes made when reviewing Russell, Inc.'s first quarter 20x1 records You observe that the company distinguishes its sales revenues from warehouse rental income.

Exhibit B: Notes made when reviewing Russell, Inc.'s first quarter 20x1 records

  1. You observe that the company distinguishes its sales revenues from warehouse rental income. Since the company has ample warehouse space, it rents certain areas of its warehouse to third parties. Russell's policy is that annual rent is prepaid in full by the third party on the effective date of the lease. It comes to your attention that on January 31 this year, one of the parties who leased warehouse space from 2/1/x0 to 1/31/x1 had moved out as of 1/31. The balance in the unearned rent revenue account represents the last month of rent for that client. No entry was made on January 31.

  1. Notes Payable: Russell signed a $400,000; 3-month, 3%-note on 2/1/x1 in exchange for inventory. Principal and total interest is to be paid on date of maturity. Russell also signed a $3,000,000, 5-year, 2%- note with the First National Bank of Bedrock on 1/1/x1. Interest is to be paid to the bank annually on 12/31. The $3,000,000 is due at maturity, 12/31/x5. The entries for the notes were recorded correctly on the dates of issue.

  1. On February 4th, office supplies were purchased on account for $15,000. This transaction was recorded as a debit to inventory and a credit to office supplies expense. You see that it is noted in the client file that after a quarter-end (3/31/x1) count of office supplies, the amount of office supplies used during the quarter was $23,000.

  1. While in the warehouse lease file you saw that Russell has another warehouse space leased for the current year; 1/1/x1 12/31/x1. Russell received a $24,000 check on January 1st from Diamond Co. who adhered to Russell's policy that annual rent is prepaid in full at the beginning of the lease. The entry recorded on January 1st for the receipt of payment from Diamond Co. was recorded as a debit to prepaid rent and a credit to rent revenue.

  1. On January 15th the company received a check from a customer in the amount of $859,000 for payment on account. You discover that this transaction was recorded as a debit to cash and a credit to accounts payable for $895,000.

  1. Russell makes annual insurance payments. Prepaid insurance was debited for the annual premium of $160,000 on 7/1/x0 and was properly adjusted fiscal year end 12/31/x0. No entries were made to the prepaid insurance account during the first quarter 20x1.

  1. The company records bad debt expense annually (no quarterly adjustments are made for bad debt expense). Entries to the utilities expense account have been verified as accurate through the end of the quarter. The entries to the salary/wage expense account have been properly recorded through the last pay period. It is determined that accrued salaries/wages at 3/31/x1 amounted to $345,000.

  1. No changes were made to depreciable assets during the quarter; depreciation expense was last recorded on 12/31/x0. The company depreciates its equipment and buildings using a straight-line basis with no residual value. The company uses 5 years as the estimated useful life for equipment, and 25 to 30 years for buildings depending on the age of the building on the date of purchase. The annual depreciation expense for equipment is $924,000; and $304,000 for buildings.

Exhibit C: Correcting Entries for Russell, Inc.

Please reference the note # from Exhibit B that was your source of information for the entry.

ACCOUNT

DEBIT

CREDIT

Account(s) to debit

xxx

Account(s) to credit

xxx

Per note #

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