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ADMS 3585 (26)
Lecture 6

Week 6 - Review Questions - Solutions.docx

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York University
Administrative Studies
ADMS 3585
Lykke Dela Cour

EXERCISE 85 1015 minutesa1Raw Materials 8100Accounts Payable81002 No adjustment necessary3Raw Materials 28000Accounts Payable280004Accounts Payable7500Raw Materials 75005Raw Materials 19800Accounts Payable19800 Item 6 represents a special sales agreement between the supplier and Motuto Machine In this arrangement the supplier has simply parked its inventory with Motutos for a short purpose and has agreed to buy it back in January presumably after the suppliers year end The risks and rewards of ownership have not passed to Motuto this inventory should remain the suppliers books at December 31 2014 See further discussion below under b regarding the ethicsItem 7 represents consignment inventory Motuto does not record this as inventory on its books at December 31 2014 The inventory belongs to Able and should be recorded on its books at December 2014Item 1 should be reversed since the journal entry was also made on Jan 2 Item 4 also has to be reversed The invoice was entered in December in error so the entry above reverses it The original entry therefore has to be reestablished in Januarya reversal of the entry aboveEXERCISE 85 Continuedb With respect to item 4 it is possible that Motutos supplier has made a clerical error in this case by issuing an invoice dated December 30 2014 prior to the shipment of the goods on January 2 2015 Motuto should point out this error particularly if discount terms apply to the purchase One must also consider the possibility that Motutos supplier is trying to manipulate its financial results for its fiscal year ended December 31 2014 They may be attempting to include a sale in their fiscal year while at the same time including the merchandise inventory on their balance sheetThis would indicate that the supplier is not acting legally and ethically and Motuto should reconsider whether or not they wish to do business with this supplier in the futureWith respect to item 5 Motuto should contact its supplier about the earlierthancontracted delivery of materials On this occasion Motuto has accepted delivery so it appears that they are Motutos goods at December 31 However the supplier should be informed that this practice is not acceptable in the future Here the ethical issue may be with the supplier did they arrange for an early delivery in order to increase their current year sales for example or was it in errorWith respect to item 6 Motuto should ensure that there is a valid business reason for holding these items ie that the supplier warehouse was indeed full They should also question why a sale and repurchase agreement has been issued If they are indeed just helping out with storing the goods there is no need to formally record a sale and repurchase
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