During the current year, Karabakh Ltd. sold off all the heating and air conditioning equipment in one of its buildings because it was being converted from an assembly plant to a warehouse. It was sold to a neighbouring business, which paid $400,000 cash. The equipment was about 10-years old, originally cost $1 million, and was approximately 90% depreciated. Karabakh’s bookkeeper recorded the sale as follows:
dr Cash ........ 400,000
cr Sales revenue ....... 400,000

a. What impact does the misstatement have on Karabakh’s financial statements? Outline which accounts will be affected and the dollar amounts of these effects.
b. Assume this transaction is material to Karabakh’s financial statements. What procedures would allow the Karabakh auditor to find this bookkeeping error?
c. Propose a draft adjusting journal entry to correct the entry.

  • CreatedJanuary 09, 2015
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