Your company audit the work for ABC Ltd for calendar year 20X1. There are 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:

5. Some debit memos that were processed and recorded after year-end relate to purchases and accounts payable for 20X1. These total $43,000.

6. 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. 7. Inventory cut off tests indicate that $28,000 of inventory received on 31 October 20X1 was recorded as purchases and accounts payable in 20X2. These items were included in the inventory count at year-end and were therefore included in ending inventory.

8. One of the directors for the ABC Ltd was a major shareholder in Fortune Manufacturing, who is their largest trade debtor (contract signed for $30,000 this year).

9. Your review of the allowance for doubtful accounts indicates that it is understated by $50,000.

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 $150,000, determined by calculating 5% of expected profit before tax. Actual profit before tax on the financial statements prior to any adjustments is $2,000,000. Required: a. Prepare the required adjusting journal entries and explain the treatment of all other issues.