Question: The current assets and current liabilities sections
The current assets and current liabilities sections of the statement of financial position of Agincourt Corp. are as follows:
The following errors have been discovered in the corporation’s accounting:
1. January 2018 cash disbursements that were entered as at December 2017 included payments of accounts payable in the amount of $35,000, on which a cash discount of 2% was taken.
2. The inventory balance is based on an inventory count that included $27,000 of merchandise that was received at December 31 but with no purchase invoices received or entered. Of this amount, $10,000 was received on consignment; the remainder was purchased f.o.b. destination, terms 2/10, n/30.
3. Sales for the first four days in January 2018 in the amount of $30,000 were entered in the sales book as at December 31, 2017. Of these, $21,500 were sales on account and the remainder were cash sales.
4. Cash, not including cash sales, collected in January 2018 and entered as at December 31, 2017, totalled $35,324. Of this amount, $23,324 was received on account after cash discounts of 2% had been deducted; the remainder was proceeds on a bank loan (the amount owed to the bank for January 2018 was included as part of Notes Payable account).
Instructions:
(a) Adjust (correct) the statement of financial position’s current assets and current liabilities sections. (Assume that both accounts receivable and accounts payable are recorded gross.)
(b) Calculate the current ratio before and after the corrections prepared in part (a). Did the changes improve or worsen this ratio?
(c) Calculate the net effect of your adjustments on Agincourt Corp.’s retained earnings balance. (d) Assume that in February 2018, Agincourt approaches its bank for another bank loan, based on its corrected statement of financial position as at December 31, 2017. Also assume that the terms of the new bank loan would require that Agincourt maintain a current ratio of 1.5. As Agincourt’s bank manager, discuss the importance of recording the adjustments above and correcting the statement of financial position as at December 31, 2017.
(e) If the adjustments had not been reflected in the statement of financial position provided to the bank manager, do you think the bank manager would have suspected that the financial statements were incorrect? If so, how would the manager have suspected this misstatement to be the case?
Transcribed Image Text:
AGINCOURT CORP. Statement of Financial Position (partial) December 31, 2017 $ 40,000 Accounts payable Notes payable $ 61,000 67,000 $128,000 Cash $89,000 7,000 Accounts receivable Allowance for doubtful accounts 82,000 Inventory Prepaid expenses 171,000 9,000 $302,000
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