AUDITING PROB

ACTIVITY 2

ANSWER THE FOLLOWING :

1. On July 1, 2020 LOTUS COMPANY purchased MANSON COMPANY , ten

year 8 5 bonds with a face amount of 1,000,000 for 840,000. The bonds
mature on June 30, 2025 and pay interest semi annually on June 30
and December 31. For the six months ended December 31, 2020, LOTUS
recorded bond discount amortization of 3,600 using the effective
interest method.

What is the amount of interest income to be recognized for the year ended
December 31, 2020 from this long term investment ?

a. 83,600
b. 36,400
c. 40,000
d. 43,600

2. The balance of LUX COMPANY advertising expense account at December

31, 2020, was 264,000 before any necessary year end adjustment
relating to the following :
1. Included in the 264,000 is the 75,000 cost of product posters for a
sles promotional campaign in January 2021
2. Radio advertisements broadcast during December 2020 were billed
to LUX COMPANY on January 3, 2021. LUX paid the 30,000 invoice
on January 15, 2021

What is the amount of advertising expense that should be reported by LUX

COMPANY in its December 31, 2021 income statement ?

a. 309,000
b. 294,000
c. 219,000
 d. 264,000

3-6 the following data were taken from the records of Jay Company for the
year 2020

Sales 5,590,000

Sales returns 55,000

Inventories January 1

Raw materials 131,000

Work in process 238,350

Finished goods 442,000

Inventories December 31

Raw materials 146,500

Work in process 175,720

Finished goods 412,000

Direct labor 1,050,300

Purchases 2,051,500

Purchase returns 17,150

Purchase discounts 12,550

Freight in 8,250

Freight out 200,000

Allowance for doubtful accounts 25,000

Sales salaries 445,000

Office salaries 155,000

Depreciation – factory building 44,000

Depreciation – office equipment 44,000

Depreciation store equipment 77,000

Depreciation machinery and equipment 25,500

Amortization – patents 33,000

Bad debts expense 20,000

Factory supplies expense 75,550

Accrued manufacturing expenses payable 34,500

Indirect labor 35,300

Interest income 116,240

Interest receivable 34,250

Factory light and power 65,000

Property taxes and insurance factory building 13,200

Prepaid insurance expense 18,750

Royalties on production 13,200

Supervision expense 65,000

Tools expense 10,500

Miscellaneous factory expense 50,150

Dividends paid 70,000

Based on the above and the result of your audit , answer the following

3. Total manufacturing cost

a. 3,450,050
b. 3,496,250
c. 3,420,750
d. 3,431,250

4. The cost of goods sold is

a. 3,588,880
 b. 3,513,380
c. 3,523,880
d. 3,542,680

5. Total selling expenses

a. 522,000
b. 735,200
c. 800,200
d. 722,000

6. The income before income taxes

a. 1,005,120
b. 1,114,860
c. 1,121,360
d. 1,051,360

Please send your solutions. Thank you