Problem 1 (14 marks) On September 1, Wilderness Inc.

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Problem 1 (14 marks)
On September 1, Wilderness Inc. had an inventory of 18 backpacks at
a cost of $30 each. The company uses a perpetual inventory system.
During September, the following transactions occurred:
Sep 4
Purchased 35 backpacks at $30 each from Back Packs
Unlimited, terms 3/10, n/30.
Sept 6 Received credit of $150 for the return of 5 backpacks
purchased on Sept. 4 that were defective.
Sept 9 Sold 20 backpacks for $50 each to University Supply, terms
2/10, n/30.
Sept 14 Paid Back Packs Unlimited in full.
Sept 18 Received payment from University Supply.
Instructions
Record the September transactions for Wilderness Inc.
Problem 2 (5 marks)
Using the following information, prepare a bank reconciliation for Gloss
Corporation at July 31, 2015:
• The unadjusted bank statement balance is $6,612.
• The unadjusted cash account balance in the general ledger is
$9,869.
• Outstanding cheques totalled $1,170.
• Deposits in transit are $4,350.
• The bank service charge is $50.
• A cheque for $196 for supplies was posted as $169 in the
company’s general ledger.
Problem 3 (5 marks)
The general ledger of Arugula Corporation at December 31, 2015
shows the following balances, all of which are normal:
Cash ………………………………… $ 28,000
Merchandise inventory ………….. 175,000
Prepaid expenses …………………
11,000
Accounts receivable ……………… 165,000
Allowance for doubtful accounts ..
12,000

Management estimates the net realizable value of accounts receivable
should be $143,000.
Instructions
(a) Prepare the adjusting entry for bad debts for 2015.
(b) Show how the current assets would be presented on the statement
of financial position at December 31, 2015.
Problem 4 (8 marks)
Condensed income statements for Collingwood Limited are shown
below for two years:
2015
2016
Sales ………………………………………… $92,000 $106,000
Cost of goods sold ………………………… 54,000
65,000
Gross profit ………………………………… 38,000
41,000
Operating expenses ………………………. 15,000
15,000
Profit before income tax …………………. $23,000 $ 26,000
Instructions
A. (2 marks) Calculate the corrected profit before income tax for 2015
and 2016, assuming that the inventory as of the end of 2015 was
mistakenly understated by $7,000 and the inventory turnover is
10.
2015
$____________ 2016 $____________
B. (5 marks) What effect would the undervaluing of inventory at the
end of 2015 by $7,000 have on the following financial measures?
Answer with O for overstate, U for understate and N for no effect for
each of the following measures:
Current ratio

_______

Debt to total assets

_______

Price earnings ratio

_______

Gross profit margin

_______

Inventory turnover

________

C. (1 mark) Imagine instead that the undervaluing of inventory at the
end of 2015 by $7,000 was not a mistake, but rather resulted from a
management decision: management decided to write down one
inventory item to a value that was $7,000 lower than the cost price
when the item was still selling at a price greater than the cost price.
In one sentence, describe circumstances that might motivate
management behaving unethically to make such a write-down.

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