Question 1

Dunn Corp. is preparing its Year 1 balance sheet. The following issues were identified during the review:
1. A $50,000 check received from a customer on December 30, Year 1, was not recorded until January 2, Year 2.
2. Inventory valued at $35,000, shipped FOB shipping point by a vendor on December 28, Year 1, was received on January 4, Year 2, and was excluded from Year 1 ending inventory.
3. A $20,000 check written to a vendor on December 29, Year 1, was mailed on January 3, Year 2, but was recorded as a cash disbursement in Year 1.

What is the net effect of correcting these errors on Dunn's Year 1 Current Assets?

Accepted Answer

Analyze each error's impact on the accounting equation (Assets = Liab + Equity). For checks written but not mailed, reverse the disbursement (Cash up, AP up). For inventory FOB shipping point, buyer owns it upon shipment (Inv up, AP up). For unrecorded cash receipts, determine if it swaps assets (AR to Cash) or increases assets (Cash Sale/Advance). Given the options, assume the receipt increases total current assets.

Question 2

What mistakes do candidates make on this CPA question?

Accepted Answer

Treating the collection on account as a net zero change (which is technically correct for AR collections but often tested as 'cash impact' or 'unrecorded revenue' in ambiguous exam questions where options guide the assumption). Forgetting to reverse held checks.

How to approach this question

Full Answer

Common mistakes

Practice the full CPA FAR Practice Exam 3

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