Mastery Problem: Accounting for Retail Businesses Merchandising Transactions You are working as a summer intern for AAA Auditing, Inc. You have been asked to help resolve discrepancies noted in the audit for Dolfin Corporation, a retailer of specialty aquarium supplies. As a retail company, Dolfin Corporation uses theperpetual inventory system. To prepare for this assignment, you have been asked to review your knowledge ofsalesand purchase transactions by completing the following table. Consider the effect of each transaction on the three accounts listed, and identify which accounts are debited or credited. If not affected by the transaction, select "No Effect". Inventory Estimated ReturnsInventoryCost of Goods Sold Purchase of merchandise for resale Cash sale of merchandise Customer returns Yearly estimate for customer returns Freight paid for merchandise purchasedFOB shipping point Return of merchandise purchased for resale Freight paid for sales withFOB destination Sale on account Customer payment on account Payment of service fee for processing credit card sales Feedback Check My Work For each transaction, think about the journal entry that would be used to record it. DebitNo EffectNo EffectCreditNo EffectDebit DebitCreditNo Effect No EffectDebitCredit DebitNo EffectNo EffectCreditNo EffectNo Effect No EffectNo EffectNo EffectCreditNo EffectDebit No EffectNo EffectNo EffectNo EffectNo EffectNo Effect Auditing Observations After going through the accounting records of Dolfin Corporation in detail, the auditor made a list of observations. You have been asked to review the effect of these observations. For each observation, identify which items on the income statement are overstated or understated. If not affected by the observation, select the "No Effect". ObservationsSalesCost of Goods SoldGross ProfitOperatingExpensesOperating Income While the company accountant was on vacation, the cost of each sale was not recorded for sales transactions. No EffectUnderstatedOverstatedNo EffectOverstated
2/6/23, 3:35 PMCengageNOWv2 | Online teaching and learning resource from Cengage Learning https://v2.cengagenow.com/ilrn/takeAssignment/takeAssignmentMain.do?invoker=&takeAssignmentSessionLocator=&inprogress=false2/3All freight costs were charged to Delivery Expense regardless of the terms of sale. Customer returns and allowances were sometimes debited to Estimated Returns Inventoryand credited to Sales. Office supplies expense was included in administrative expenses. Sales tax collected on each sale was credited to Cost of Goods Sold. Inventory shrinkagewas credited to Miscellaneous Selling Expense. Credit card processing fees were debited to Cost of Goods Sold. Feedback Check My Work Consider the effect of each error on the income statement. Compare what should have been recorded to what was actually done. No EffectNo EffectNo EffectOverstatedUnderstated OverstatedNo EffectOverstatedNo EffectUnderstated No EffectNo EffectNo EffectNo EffectNo EffectNo EffectUnderstatedOverstatedNo EffectOverstatedNo EffectNo EffectNo EffectUnderstatedOverstated No EffectOverstatedUnderstatedUnderstatedNo EffectIncome Statement The accountant for Dolfin Corporation prepared the following income statement. The auditor has asked you to use this statement to provide additional information to Dolfin Corporation on the Final Questions.
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