Inventory Cutoff

1. This is an individual project. You should not discuss it with anyone, living or dead, other than Dr. Pitman. Students are expected to follow the UTSA Honor Pledge: “As a UTSA Roadrunner I live with honor and integrity.” 2. There are several parts of this project that you must complete. 3. You have been assigned to the Namtip, Ltd.’s December 31, 2015 audit and will be assisting in several areas of the audit. Accordingly, you may find it useful to review the appropriate chapters in an intermediate accounting textbook and your auditing textbook. 4. All of your answers should be included in the attached PC Word® file named Project 2 Answers.docx. Do Not change the file name. 5. You should submit your file by attaching it through the assignment page of Blackboard Learn. (For help in submitting your assignment see: https://help.blackboard.com/en-us/Learn/9.1_2014_04/Student/060_Assignments/010_Submit_Assignments). Students are responsible for ensuring that they have attached the appropriate file and submitted the assignment. 6. There will be no “pregrading” of any project. Once you have submitted the file to Blackboard Learn, it is considered to be final and will be graded accordingly. 7. If you have any questions about the assignment, please contact Dr. Pitman. 8. Only projects submitted through Blackboard Learn will be graded. Unreadable or corrupt files will be treated as a nonsubmission. 9. Failure to follow the instructions will result in a loss of points. 10. No late assignments will be accepted nor graded. 2 Consider Each Part Independently Part I—Inventory Cutoff Only merchandise shipped by the Namtip to customers up to and including on December 30, 2015, has been eliminated from its inventory in its accounting records. The annual physical inventory count was taken on December 30, 2015 after the close of business has been recorded on the books by the company’s controller. No perpetual inventory records for finished goods are maintained. All sales are made on an FOB–shipping point basis. You are to assume that all purchase invoices have been correctly recorded. The following lists of sales invoices are entered in the sales journal for the last part of December 2015 and first part of January 2016, respectively. Sale Sales Invoice Amount Sales Invoice Date Cost of Merchandise Sold Date Shipped December 2015 A $ 3,000 Dec 21 $ 2,000 Dec 31 B 2,000 Dec 31 800 Dec 13 C 1,000 Dec 29 600 Dec 30 D 4,000 Dec 31 2,400 Jan 9 E 10,000 Dec 30 5,600 Dec 29* January 2016 F 6,000 Dec 31 4,000 Dec 30 G 4,000 Jan 2 2,300 Jan 2 H 8,000 Jan 3 5,500 Dec 31 *sent to a consignee Prepare the necessary proposed adjusting journal entry, in proper form, for each of the Sales (A through H). If no adjusting journal entry is necessary, you should write NO ADJUSTING ENTRY NEEDED in the space for that sale. Part II—Inventory Costing (Pricing) Now you are performing costing (pricing) tests on a sample of the ending inventory. One of the items you selected for cost (price) testing is the orange widget, a significant part in the manufacture of Namtip’s main products. You noted that the 12/31/15 inventory record of the orange widgets consisted of 1,263 units (you previously verified that this agreed to the quantity indicated from the physical inventory) at $782 each for a total of $987,666. Part II A. When you look at the invoices for the November and December purchases of the orange widgets, you see the following: Date Quantity Unit Price Total 11/03/15 1,000 $765 $ 765,000 11/22/15 500 770 385,000 12/03/15 800 777 621,600 12/28/15 600 782 469,200 Prepare the adjusting entry, in proper form, for the proper cost of orange widgets at December 31, 2015, assuming Namtip Ltd. uses the periodic FIFO method of inventory. Show supporting calculations as necessary. 3 Part II B—Ignore part A. above. Assume you determined that the net realizable value for an orange widget is $775 per unit, while the net realizable value less a normal margin is $745 per unit. Prepare the adjusting entry, in proper form, for the proper presentation of orange widgets at December 31, 2015 assuming you examined a vendor invoice dated December 31, 2015 for 500 orange widgets at $750 each for a total of $375,000. The units were ordered on December 29, 2015 and received on January 4, 2016. Show supporting calculations as necessary. Part III— Accounts Receivable—Allowance for Doubtful Accounts Another area you have been assigned on the audit is Accounts Receivable—more specifically the Allowance for Doubtful Accounts. You performed the following analysis for the Allowance for Doubtful Accounts: Description Amount Tick Mark Beginning Balance $ 154,000 £ Increase (2% of $10,000,000 credit sales) 200,000 √ Write offs (95,000) ᴓ Recovery of previously written off accounts 15,000 € Ending Balance $ 274,000 μ ¥ Tick Mark Legend: £ Traced to prior year’s audit documentation. √ Calculated. ᴓ Reviewed authorization memorandum from the Treasurer. € Traced to cash receipts and reviewed supporting documentation. μ Footed. ¥ Traced to the 12/31/15 general ledger. After several discussions with Namtip’s controller, it has was determined that Namtip should adopt the aging method for estimating the Allowance for Doubtful Accounts. A summary of the aging is as follows: Classification by Month of Sale Balance Estimated % Uncollectible November-December 2015 $ 1,080,000 2% July-October 2015 650,000 10% January-June 2015 420,000 25% Prior years’* 150,000 70% Total $ 2,300,000 *$60,000 of the balance is totally uncollectible and should be written off prior to the yearend adjustment. Prepare the proposed necessary adjusting journal entries, in proper form, to ensure that the Allowance for Uncollectible Accounts is in accordance with generally accepted accounting principles as of December 31, 2015. Show supporting calculations as necessary. 4 Part IV—Plant, Property and Equipment The accompanying analyses of the Property, Plant, and Equipment and related Accumulated Depreciation accounts have been prepared by the chief accountant of the Namtip. You have traced the beginning balances to your prior year’s audit working papers. Namtip Ltd. Analyses of Property, Plant, and Equipment and Related Accumulated Depreciation Accounts For the Year Ending December 31, 2015 Assets Per Ledger 12/31/14 Additions Retirements Per Ledger 12/31/15 Land 422,500 5,000 427,000 Buildings 120,000 17,500 137,500 Machinery and Equipment 385,000 40,400 26,000 399,400 Total 927,500 62,900 26,000 964,400 Accumulated Depreciation Buildings 60,000 5,150 65,150 Machinery and Equipment 173,250 39,220 -0- 212,470 Total 233,250 44,370 -0- 277,620 All plant assets are depreciated on the straight-line basis (no residual value taken into consideration) based on the following estimated service lives: building, 25 years; and all other items, 10 years. The company’s policy is to take one half-year’s depreciation on all asset additions and disposals during the year. Your audit revealed the following information: 1. On April 1, the company entered into a 10-year lease contract for a die casting machine, with annual payments of $5,000 payable in advance every April 1. The lease is cancelable by either party (60 days’ written notice is required), and there is no option to renew the lease or buy the equipment at the end of the lease. The estimated service life of the machine is 20 years with no residual value. The company recorded the die casting machine in the Machinery and Equipment account at $40,400, the present value at the date of the lease, and $2,020 applicable to the machine has been included in depreciation expense for the year. 2. The company completed the construction of a wing on the plant building on June 30. The service life of the building was not extended by this addition. The lowest construction bid received was $17,500, the amount recorded in the Buildings account. Company personnel constructed the addition at a cost of $16,000 (materials, $7,500; labor, $5,500; and overhead, $3,000). 3. On August 18, $5,000 was paid for paving and fencing a portion of land owned by the company and used as a parking lot for employees. The expenditure was charged to the Land account. 4. The amount shown in the machinery and equipment asset retirement column represents cash received on September 5 upon disposal of a machine purchased in July 2011 for $48,000. The chief accountant recorded depreciation expense of $3,500 on this machine in 2015. 5. Harbor City donated land and a building appraised at $100,000 and $400,000, respectively, to Namtip, Ltd. for a plant. On September 1, the company began operating the plant. Since no costs were involved, the chief accountant made no entry for the above transaction. Prepare the adjusting journal entries, in proper form, that you would propose at December 31, 2015, to adjust the accounts for each the above transactions (1-5). Disregard income tax implications. The accounts have not been closed. Computations should be rounded off to the nearest dollar. If no adjusting journal entry is necessary, you should write NO ADJUSTING ENTRY NEEDED in the appropriate space. Show supporting calculations as necessary.