Question

1.

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 the perpetual inventory system. To prepare for this assignment, you have been asked to review your knowledge of sales and 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".

2. 

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".

Income 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.

Answer 1

	Merchandise Inventory	Estimated Returns Inventory	Cost of Merchandise Sold
Purchase of merchandise for resale	Debit	No effect	No effect
Customer returns	Debit	Credit	No effect
Customer payment on account	No effect	No effect	No effect
Payment of service fee for processing credit card sales	No effect	No effect	No effect
Sale on account	Credit	Debit	Debit
Return of merchandise purchased for resale	Credit	No effect	No effect
Yearly estimate for customer returns	No effect	Debit	No effect
Freight paid for sales with FOB destination	No effect	No effect	No effect
Cash sale of merchandise	Credit	No effect	Debit
Freight paid for merchandise purchased FOB shipping point	Debit	No effect	No effect