The Shelly Corporation is an importer and wholesaler. Its merchandise is purchased from several suppliers and is warehoused by Shelly Corporation until sold to consumers. In conducting her audit for the year ended June 30, 2007 the corporation’s CPA determined that the system of internal control was good. Accordingly, she observed the physical inventory at an interim date, May 31, 2007, instead of at year-end.
The CPA obtained the following information from the general ledger:
Inventory, July 1, 2006 …………………………………..$ 87,500
Physical inventory, May 31, 2007 ………………………. 95,000
Sales for 11 months ended May 31, 2007 ……………….. 840,000
Sales for year ended June 30, 2007 ……………………… 960,000
Purchases for 11 months ended May 31,
2007 (before audit adjustments) …………………………. 675,000
Purchases for year ended June 30, 2007
(before audit adjustments) ……………………………….. 800,000
The CPA’s audit disclosed the following information:
Shipments received in May and included in
the physical inventory but recorded as
June purchases ……………………………………………… $7,500
Shipments received in unsalable condition
and excluded from physical inventory;
credit memos had not been received nor
had chargebacks to vendors been recorded:
Total at May 31, 2007 ……………………………………..... $1,000
Total at June 30, 2007 (including the
May unrecorded chargebacks) ………………………………. $1,500
Deposit made with vendor and charged to
purchases in April 2007. Product was
shipped in July 2007. ……………………………………….. $2,000
Deposit made with vendor and charged
to purchases in May 2007. Product
was shipped, FOB destination, on
May 28, 2007, and was included in
May 31, 2007 physical inventory as
goods in transit. …………………………………………….. $5,500
Through the carelessness of the receiving
department, a June shipment was
damaged by rain. This shipment
was later sold in June at its cost of $10,000.

Required
In audit engagements in which interim physical inventories are observed, a frequently used auditing procedure is to test the reasonableness of the year-end inventory by the application of gross profit ratios. Prepare in good form the following schedules:
1. Computation of the gross profit ratio for 11 months ended May 31, 2007.
2. Computation by the gross profit ratio method of cost of goods sold during June 2007.
3. Computation by the gross profit ratio method of June 30, 2007 inventory.

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Status NEW Posted 15 May 2017 03:05 PM My Price 8.00

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