You have been engaged for the audit of the Y Company for the year ended December 31, 2011. The Y Company is in the wholesale chemical business and makes all sales at 25% over cost. Following are portions of the client€™s sales and purchases accounts for the calendar year 2011.

You observed the physical inventory of goods in the warehouse on December 31, 2011, and were satisfied that it was properly taken.
When performing a sales and purchases cutoff test, you found that at December 31, 2011, the last receiving report that had been used was no. 1063 and that no shipments have been made on any sales invoices with numbers larger than no. 968. You also obtained the following additional information:
1. Included in the warehouse physical inventory at December 31, 2011 were chemicals that had been acquired and received on receiving report no. 1060 but for which an invoice was not received until the year 2012. Cost was $2,183.
2. In the warehouse at December 31, 2011 were goods that had been sold and paid for by the customer but which were not shipped out until the year 2012. They were all sold on sales invoice no. 965 and were not inventoried.
3. On the evening of December 31, 2011 there were two cars on the Y Company siding:
(a) Car AR38162 was unloaded on January 2, 2012, and received on receiving report no. 1063. The freight was paid by the vendor.
(b) Car BAE74123 was loaded and sealed on December 31, 2011, and was switched off the Company's siding on January 2, 2012. The sales price was $12,700 and the freight was paid by the customer. This order was sold on sales invoice no. 968.
4. Temporarily stranded at December 31, 2011 on a railroad siding were two cars of chemicals en route to the Z Pulp and Paper Co. They were sold on sales invoice no.
966, and the terms were FOB destination.
5. En route to the Y Company on December 31, 2011 was a truckload of material that was received on receiving report no. 1064. The material was shipped FOB destination, and freight of $75 was paid by the Y Company. However, the freight was deducted from the purchase price of $975.
6. Included in the physical inventory were chemicals exposed to rain during transit and deemed unsalable. Their invoice cost was $1,250, and freight charges of $350 had been paid on the chemicals.

Required
a. Compute the adjustments that should be made to the client's physical inventory at December 31, 2011.
b. Prepare a worksheet of adjusting entries that are required as of December 31,2011.*

Transcribed Image Text:

Balance Forward Date Amount 12-31 Closing entry $699,860 *SI#965 SI#966 12-31 SI #971 $699,860 $699,860 Si-Sales invoice. 12-31 Closi ng entry $385,346 tRR# 1059 RR#1061 RR#1062 RR#1063 $385,346 R- Receiving report.