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You are working as a summer intern for AAA Auditing. You have been asked to help resolve discrepancies noted in the audit for Dolfin Company,

You are working as a summer intern for AAA Auditing. You have been asked to help resolve discrepancies noted in the audit for Dolfin Company, a retailer of specialty aquarium supplies.

As a merchandising company, Dolfin Company uses the perpetual inventory system. To prepare for this assignment, you have been asked to review your knowledge of sales and purchase transactions by completing the following table.

Consider the effect of each transaction on the three accounts listed, then use checkmarks to identify which accounts are debited or credited. If none of these accounts is affected by the transaction, check the No Effect box.

Merchandise Inventory

Estimated Returns Inventory

Cost of Merchandise Sold

No Effect

Debit

Credit

Debit

Credit

Debit

Credit

Purchase of merchandise for resale

Customer returns

Customer payment on account

Payment of service fee for processing credit card sales

Sale on account

Return of merchandise purchased for resale

Yearly estimate for customer returns

Freight paid for sales with FOB destination

Cash sale of merchandise

Freight paid for merchandise purchased FOB shipping point

Auditing Observations

After going through the accounting records of Dolfin Company in detail, the auditor made a list of observations. You have been asked to review the effect of these observations.

For each observation, use checkmarks to identify which items on the income statement are overstated or understated. If none of these items is affected by the observation, check the No Effect box.

Observations

Sales

Cost of Merchandise Sold

Gross Profit

Operating Expenses

Income from Operations

No Effect

Overstated

Understated

Overstated

Understated

Overstated

Understated

Overstated

Understated

Overstated

Understated

While the company accountant was on vacation, the cost of each sale was not recorded for sales transactions.

Inventory shrinkage was credited to Miscellaneous Selling Expense.

All freight costs were charged to Delivery Expense regardless of the terms of sale.

Customer returns and allowances were sometimes debited to Estimated Returns Inventory and credited to Sales.

Office supplies expense was included in administrative expenses.

Credit card processing fees were debited to Cost of Merchandise Sold.

Sales tax collected on each sale was credited to Cost of Merchandise Sold.

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