Auditing Concepts

ACCT 464
Spring 2021 Semester

Accounting Refresher Exercise

Note:

1. The goal of this is to assess your knowledge of core accounting concepts that are required for successful completion of the auditing course.
2. The exercise is to be completed by each student without any additional support and responses uploaded into Canvas.
3. Responses must be typed and presented in a professional manner accompanied by the project certification statement.
4. You are provided with a company’s balance sheet for the year ended December 31, 20×1, and are asked to complete the requirements on pp3-4
5. The grading scale is provided on p4

Stump Hill Inc.
Balance Sheet
December 31, 20×1

Assets

Cash                                                                                                      $100,000
Accounts Receivable                                                                        125,000
Inventory                                                                                              660,000
Property, Plant and Equipment                                 500,000
Less: Accumulated Depreciation                                50,000                    450,000
Investments                                                                                         200,000

Total Assets                                                                                                       1,535,000

Liabilities and Stockholders’ Equity

Liabilities
Accounts Payable                                                                                 $ 40,000
Accrued Expenses                                                                                   60,000
Unearned Revenue                                                                              100,000
Notes Payable                                                                                        300,000

Total Liabilities                                                                                                        500,000

Stockholders’ Equity
Common Stock ($1 par value, 50,000 shares issued and
outstanding)                                                                                        50,000
Paid in Capital                                                                                          200,000
Retained Earnings                                                                                  785,000

Total Stockholders’ Equity                                                                           1,035,000

Total Liabilities and Stockholders’ Equity                                                             1,535,000

20×2 Transactions

Stump Hill Inc. is a merchandising company

1. The company collected 90% of the December 20×1 Accounts Receivable balance
2. The company sold $900,000 of products on account (The product cost was $600,000). It subsequently collected 90% of the amount owed by customers.
3. The company paid the account payable balance in January 20×2 and 50% of the accrued expenses
4. The company incurred and paid the following expenses during the year – Rent $10,000; Salaries and payroll related taxes $40,000; Administrative $20,000
5. The company depreciates assets using the straight-line method. It assumes a 10-year useful life with no salvage value
6. The investments are classified as trading securities and the value shown on the balance sheet is at cost. However, the market value declined to $180,000 in 20×2
7. The company conducts an inventory count at year end and the count showed $50,000 worth of inventory in the warehouse.
8. The company accrued the following items at December 31, 20×2: – an invoice from the attorney for $5,000; unpaid payroll and related cost for $6,000. The notes were issued on 12/31/x1 with a 5% coupon rate and a five-year maturity date.  The first interest payment is due on 1/1/x3
9. The company uses the allowance method for uncollected accounts and expects that 2% of the accounts receivable balance is uncollectible
10. The company accrues income taxes at year end using a 10% effective tax rate

Required (Part I)[1]

1. Record the above transactions on the instructor provided working trial balance (WTB). Determine the ending account balances at 12/31/x2.

Note: You will need to add accounts that were not provided.  Also, consider creating the JEs and then post them to the WTB.

2. Prepare the following financial statements (in good form)
   1. Income Statement for the year ending December 31, 20×2
   2. Balance Sheet at 12/31/x2

Stump Hill Inc.
Bank Reconciliation
December 31, 20×1

Stump Hill Inc. has an operating account which is maintained at Turtle Bank. You learned the following:

• The cash receipts journal showed cash of $5,000 received on December 31, 20×1 and the deposit was made on the same day. The deposit was not recorded in the bank until January 2, 20×2
• The balance per the General Ledger was $100,000 at December 31, 20×1 (see page 1)
• The operating account balance per the Turtle Bank December 31, 20×1 bank statement was $120,000
• The check register showed the following outstanding checks:

Check # Check Date         Payee                                   Amount

905                       9/25/20×1            City of Turtle Pond          $5,000

1102                       11/2/20×1            Kellits Police                       3,000

1151                       12/1/20×1            Clarendon County           10,000

1152                       12/1/20×1            Crofts Hill Growers            2,000
1170                       12/31/20×1         City of Turtle Pond             5,000

1171                       01/02/20×2         Kellits Growers                    5,000

Required (Part II): Prepare Stump Hill Inc.’s bank reconciliation for the month of December 31, 20×1 (in good form).

Grading Scale (based on the completeness and accuracy of submission

[1] The completed WTB and the statements in #2 may be submitted for grading.  The individual certification statement should accompany the submission