Auditing Problems-Review

AUDIT OF SHAREHOLDERS EQUITY REVIEW PROBLEM

Problem 4
A CPA was engage by GROOM Company in 2016 to examine its books and records and to make whatever
corrections are necessary. An examination of the accounts discloses the following:
a. Dividends had been declared on December 15 in 2014 and 2015 but had not been entered in the books
until paid.
b. Improvements in buildings and equipment of 32,400 had been debited to expense at the end of April
2013. Improvements are estimated to have 12-year life. The company uses the straight line method in
recording depreciation and computes depreciation to the nearest month
c. The physical inventory of merchandise had been understated by 9,600 at the end of 2014 and by 14,250
at the end of 2015
d. The merchandise inventories at the end of 2015 and 2016 did not include merchandise that was then in
transit and to which the company had title. These shipments of 6,300 and 8,700 were recoded as
purchases in January of 2016 and 2017 respectively
e. The company had failed to record sales commission payable of 10,800 and 3,300 at the end of 2015 and
2016 respectively.
f. The company had failed to recognize supplies in hand of 2,550 and 5,160 at the end of 2015 and 2016,
respectively
The retained earnings account appeared as shown below on the date the CPA began the examination
RETAINED EARNINGS
DATE ITEM DEBIT CREDIT BALANCE
2014 Jan 1 Balance 195,000
Dec 31 Net income 84,000 279,000
2015 Jan 10 Dividends paid 46,500 232,500
Mar 6 Stock sold-excess over par 63,000 295,500
Dec 31 Net income 53,400 242,100
2016 Jan 10 Dividends paid 46,500 195,600
Dec 31 Net income 57,900 137,700

1. What is the corrected 2014 net income/loss?

a. 124,200 b. 90,900 c. 54,300 d. 71,700
2. What is the corrected 2015 net income/loss?
a. 53,400 b. 66,000 c. 54,300 d. 59,700
3. What is the corrected 2016 net income/loss?
a. 64,740 b.62,340 c. 56,040 d. 71,040