Preparing Adjusting Entries and Comparative Adjusted Financial Statements for Fantastic Corporation
What are the key audit findings that require adjusting entries for Fantastic Corporation?
A series of audit findings require adjusting entries for items such as cash and cash equivalents, accounts receivable, inventory, investments, prepaid expenses, fixed assets, mortgage payable, accrued expenses, and customer advances.
Key Adjustments for Fantastic Corporation:
To address the audit findings and prepare the necessary adjusting entries, a comprehensive analysis of each item is required. The adjustments involve recognizing income, expenses, assets, and liabilities that were not properly recorded or included in the financial statements. Some key adjustments include:
1. Cash and Cash Equivalents:Adjusting the cash and cash equivalents account to include the petty cash fund established in December 2021 and replenished in January 2022.
2. Accounts Receivable:Recognizing the selling price of unsold goods shipped to Royal Sales Company in accounts receivable and adjusting the inventory for the goods not included.
3. Inventory:Correcting errors in the inventory account for 2020 and adjusting the 2021 ending inventory for consigned goods and customer materials.
4. Investments:Adjusting the investment balance to reflect the market value of the shares of Fantastic's ordinary shares acquired in 2021.
5. Prepaid Expenses:Recognizing prepaid insurance expense for the building premium paid in 2020 and adjusting the prepaid expense account for actual supplies on hand in 2021.
6. Fixed Assets:Accounting for the sale of equipment on July 1, 2021, by removing it from the fixed assets and crediting the proceeds to sales.
7. Mortgage Payable:Accruing interest expense on the mortgage payable, which was not recorded at year-end.
8. Accrued Expenses:Adjusting the recorded expenses for 2021 to include expenses related to 2020 that were not accrued at the end of 2020 and recognizing the accrued expenses as of December 31, 2021.
9. Customer Advances:Adjusting the customer advances, received but not yet shipped, to be excluded from sales.
Comprehensive Analysis of Adjustments and Preparation of Financial Statements:
Each adjustment mentioned in the audit findings for Fantastic Corporation requires a detailed review of the financial records and transactions. The adjustments aim to accurately reflect the financial position, performance, and cash flows of the company by rectifying any misstatements or omissions in the financial statements.
Cash and Cash Equivalents:The adjustment for cash and cash equivalents includes recognizing the petty cash fund and adjusting the cash in bank to reflect the money market funds and commercial papers with their respective maturity dates.
Accounts Receivable and Inventory:Adjustments for accounts receivable involve recognizing the selling price of unsold goods and estimating uncollectible amounts from other customer accounts. The inventory adjustments address errors in counting and including consigned goods and customer materials.
Investments and Prepaid Expenses:Adjustments for investments and prepaid expenses aim to properly reflect the market value of shares acquired and recognize prepaid insurance expense for the building premium paid in 2020.
Fixed Assets and Mortgage Payable:Adjustments for fixed assets include accounting for the sale of equipment and accruing interest expense on the mortgage payable. These adjustments impact the company's assets and liabilities.
Accrued Expenses and Customer Advances:Recognizing accrued expenses and adjusting customer advances help in accurately representing the company's liabilities and revenue recognition. These adjustments align the financial statements with the actual financial position and performance of Fantastic Corporation.
After making these adjusting entries, the comparative adjusted financial statements for Fantastic Corporation can be prepared. These statements will provide stakeholders with a true representation of the company's financial performance and position for the years 2021 and 2020.