In your audit of Payton Industries for calendar year 20X0, you found some issues that you believe represent possible adjustments to the companys books. In addition, there are others issues that need to be addressed. All issues are listed below:

Page 8 of 10

1. On 23 December 20X0, Payton Ltd declared a bonus issue of 1000 shares with a par value of $100 000 of its ordinary shares, payable 2 February 20X1 to the ordinary shareholders on record as at 30 December 20X0. 2. Several debit memos that were processed and recorded after year-end relate to purchases and accounts payable for 20X0. These total $30 000. 3. Inventory cut off tests indicate that $35 000 of inventory received on 30 December 20X0 was recorded as purchases and accounts payable in 20X1. These items were included in the inventory count at year-end and were therefore included in ending inventory. 4. Electricity and other utilities invoices received after the cut-off date $37 000. 5. The company has not established a reserve for obsolescence of inventories. Your tests indicate that such a $33 000 reserve is appropriate under the circumstances. 6. Your review of the allowance for doubtful accounts indicates that it is understated by $42 000. 7. The company was concerned about the possibility of a liability, amounting to $94 000, that may result from an income tax dispute. 8. One of the directors at Payton Ltd was a major shareholder in Fortune Manufacturing, who is their largest trade debtor (contract signed for $ 400 000 this year). You have noticed that the managements attitude is that once the books are closed, theyre closed, and they do not want to make any adjustments. Planning materiality for the engagement was $110 000, determined by calculating 5% of expected profit before taxes. Actual profit before taxes on the financial statements prior to any adjustments is $1 552 700. Required: a. Prepare the required adjusting journal entries and explain the treatment of all other issues. (15 marks) b. Given the managements attitude about books being closed, what would you do in the circumstances? Explain. (5 marks)