 Hello and welcome to this session in which we would learn how to solve or approach a CPA exam simulation The first thing you do when you have a CPA exam simulation is to take a look at the simulation itself and see what type of simulation There is well, let's take a look. Well, it looks like Journal entries. We're gonna have to prepare some journal entries. Great. You would say I know how to prepare journal entries The next thing is what are the journal entries about there's journal entries, but what is the topic? So let's read real quick and this CPA simulation don't even have any exhibits So it should be pretty straightforward because many people fear exhibits so during the course of year two of Chester County audit of Chester company the auditor discovered potential car off problems That this is what the simulation is all about that may or may not read adjusting entries adjusting journal entries So we are dealing with car off problems. They may or may not need Adjusting journal entries. So for each of the potential car off problems indicated below Complete the required journal entries. Now here make sure you read the instruction So let's go ahead and get started and learn how to solve this problem Before we proceed any further. I have a public announcement about my company farhat lectures comm Farhat accounting lectures is a supplemental educational tool That's gonna help you with your CPA exam preparation as well as your accounting courses My CPA material is aligned with your CPA review course such as Becker, Roger, Wiley, Gleam, Miles My accounting courses are aligned with your accounting courses broken down by chapter and topics. My resources consist of Lectures multiple choice questions true false questions as well as exercises. Go ahead start your free trial today Well, let's take a look at the first scenario. Here's the scenario and you are being asked to Answer the question. Well, the first question is this The company shipped merchandise with a carrying value of 75,000 FOB destination on December 23rd year 2 and Recorded the sale and the relief of inventory of that date The customer received the merchandise on December 31st year 2. The merchandise has a gross profit margin of 10% Record the necessary year to adjusting entry if any so what they're asking you to do is this Evaluate the statement we sold merchandise We shipped the merchandise and we recorded the sale the shipping was FOB destination Well, what does it mean if it's FOB destination if it's FOB destination It means the sale is not complete until the customer receives the product Well, it looks like the customer receives the product on December 31st year 2 Well, if we shipped it in year 2 and they received it in year 2. It's FOB destination Well, I see nothing wrong with this now if the customer did not receive the product until year 3 Then we might have to back out reverse the entry of the sale But here no entry is required because Everything looks good. Now if you are now, let me tell you this let me give you this this this trick if you have two minutes left on this exam and What I would do is and you don't have time to even read anything I'll just go in there and click on no entry required because that's one of the answers. Okay, but Nevertheless, we have plenty of time. So let's go ahead and solve it And this is I would say this this a question is as easy as I can turn this into a multiple choice an easy multiple choice Except here they're telling you evaluate simply put. This is a true false statement In talking about true false statement. I just have an idea because on Farhat lectures Part of my learning tools is true false statement. For example, I May give you something like this. I'd say is this true or false and the answer is what you did is true No entry is required. We're done with the first one Let's take a look at the second scenario The company shipped merchandise with a carrying amount of 45 to a consignee on December 31st year 2 and Recorded the sale and the relief of inventory on that date. Wow. Wow. Okay. Let's keep going because this is a Consignee the consignee has not sold the merchandise. I would stop right there. The merchandise is as of January 1st As of January 5th year 3, so we shipped the product as a consignee with the consignee Well, what does that mean when you ship the product as a consignee or to a consignee? It means all what you're doing is you are transporting the Product from your warehouse to the store. Let me give you an example if you don't understand consignee or consignee relationship How does it work? Well, it means we Have a product and let's assume Walmart. I want to sell my product at Walmart. I am selling calculators So I would ship my calculators to Walmart But I cannot record the sale because all what happened is Walmart is holding that merchandise Holding that merchandise for me holding it for me means what it means they're holding it until they sell it So there's no sale because I shipped it to Walmart. I did not sell it to Walmart Walmart is holding it Walmart did not take ownership Walmart did not buy it from me I'm waiting until Walmart buys it Okay, so that's what we are looking at here Therefore a sale was not the proper thing to do recording a sale and the relief of inventory was not the proper thing To do what does that mean here? It means we have to reverse the sale and put back the inventory So let's first reverse reverse the sale. Well, well to reverse the sale I'm gonna debit because I credited sales. I'm gonna debit sales And what I did is I debit account receivable. I'm gonna credit account receivable Also, since I relieved of the inventory, I'm gonna put the inventory back on the books because that's the entry when you Book the sale and I'm gonna credit cost of goods So basically reverse because what I did when I made the sale, let me just kind of maybe I need to Show you what I just did because when I made the sale when you make the sale you debit account receivable Credit sales debit cost of goods sold Credit inventory. This is the entry that you make when you make the sale and you relieve the inventory Well, what I did is I'm going to reverse this Okay, I'm going to reverse this. How am I going to reverse this first? The inventory has a carrying amount of 45. Well, I'm gonna put back the inventory at 45,000. That's pretty straightforward And I'm gonna reverse cost of goods sold at 45,000. That's also easy to complete Now I am told the merchandise has a gross profit of 10% Well, what does that mean if they have a gross profit of 10% it means when I sold them I made 10% on the sale. So how do I figure this out? Well, if I am dealing if I'm dealing with inventory of 45,000 45,000 and I'm going to be making 10% of the sale It means The 45,000 represent 90% because remember 100% is the total part of it cost part of it Profit what we are told the cost is how do I know the cost is 90 because the profit is 10% So if I take 45,000 divided by 0.9, let me just do this I'm gonna go to the calculator 45,000 divided by 0.9. That's gonna give me A sale of 50,000 now you could also double check that you can go You can go backward. You could say well if I indeed the sale is 50% so 50% Times 0.1 0.10. That's 5,000. So of the sale 5,000 is profit 45 is what 45 is cost Therefore what I would do I will debit my sales 50,000 because what I did originally I credited my sales 50,000 and I debited my account receivable 50,000 So what I did originally let me just go back to the original since the original entry since I have the numbers The original entry was I debited account receivable 50,000 credited sales 50,000 Debited cost of goods sold 45 credited cost of goods sold 45 Again, if you don't have time to finish this at least Put the account down Put the inventory because you are giving the inventory if you don't have time to calculate sales. That's fine But at least for one thing sales has to be more than inventory, right? Because you sold it for more and they're telling you the merchandise has a gross profit of 10% It means 90% was The 45,000 represent 90% of the sale Okay, hopefully you know how to do this because you want to you want to be comfortable with this gross profit margin Let's take a look at the third scenario if I don't have time I'll click on no entry if I have like less than a minute to go or like, you know Five seconds or something like that But we have time at the beginning of year two the company entered into a three-year contract to provide services at 30,000 per year Okay The contract was that the total contract was 90,000 makes sense three years 30,000 a year And services will be provided continuously over the three-year period. That's fine The contract was paid on fall january 1st and the company recorded 90,000 as revenue on that date. Wow. Well, that's incorrect. So here's what they did Here's what they did on the on the on the date The contract was signed We debited cash because we received cash of 90,000 and we Credited revenue. This is what actually happened and this is why here I'm going to take this opportunity to mention that this is why I always I would always prefer that you take Accounting first before auditing because those are financial accounting entries So what do I have to do? Well, the service revenue is not correct because at the beginning of year two I recorded 90,000 of revenue. Well, that's not true for year two because I'm dealing with year two I should only have 30,000 of revenue. What does that mean since I recorded 90,000 of revenue? I'm going to have to debit my revenue I have to debit my service revenue $60,000. Why debit? Why debit at $60,000? Because let's go back and take a look at what I did here If I have revenues, so if I'm looking at my revenue account I initially credited 90 I only need to have 30 I have to debit 60. So what's left is 30 So I'm going to debit revenue and what do I do? So if I take it out of revenue, where do I put it? Well, if it's not revenue yet It's a liability because I receive the cash and it's unearned revenue, but I don't have unearned revenue It's called contract liability, which is the equivalent number of unearned revenue So I have a contract liability to do what to do the work for 60 I would say this This CPA exam simulation It should take you if you have basic Accounting understanding if you have basic and I mean by basic. I really mean by basic Uh, you should be able to ace this. So notice the CPA exam simulation is not difficult. It's not difficult For example, this one I would not say it's difficult. It's even easier than a multiple choice question And why it's easier because on a multiple choice, you may get the whole thing right or the whole thing wrong Here you might get the account rights some numbers right so you can get partial credit The key is to learn the information inside out Farhat lectures will help you with the basic accounting information. So you can deal with this simulation with full confidence with full confidence What should you do now go to farhat lectures look at additional resources if if you're studying for the audit exam and you feel For example, f o b destination f o b shipping is not is you're not comfortable with this go to my f o b destination f o b Shipping and learn the information. Good luck study hard and of course stay safe