You recently joined the internal auditing department of Marcus Clothing Corporat
ID: 2350963 • Letter: Y
Question
You recently joined the internal auditing department of Marcus Clothing Corporation. As one of your first assignments, you are examining a balance sheet prepared by a staff accountant.
Marcus Clothing Corporation
Balance Sheet
At December 31, 2011
Assets
Current Assets:
Cash $137,000
Accounts Receivable, net 80,000
Note Receiveable 53,000
Inventories 240,000
Investments 66,000
Total Current Assets 576,000
Other Assets:
Land $200,000
Equipment, net 320,000
Prepaid expenses 27,000
Patent 22,000
Total other assets 569,000
Total assets $1,145,000
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $125,000
Salaries payable 32,000
Total Current Liablilites 157,000
Long-term liabilites:
Note payable $100,000
Bonds payable 300,000
Interest payable 20,000
Total long-term liabilites 420,000
Shareholders' Equity:
Common Stock 500,000
Retained earnings 68,000
Total shareholders' equity 568,000
Total liabilities and shareholders equity $1,145,000
In the course of your examination you uncover the following information pertaining to the balance sheet:
1. The company rents its facilities. The land that appears in the statement is being held for future sale.
2. The note receiveable is due in 2013. The balance os $53,000 includes $3,000 of accrued interest. The next interest payment is due July 2012.
3. The note payable is due in installments of $20,000 per year. Interest on both the notes and bonds is payable annually.
4. The company's investments consist of marketable equity securities of other corporations. Managment does not intend to liquidate any investments in the coming year.
Required::
Identify and explain the deficiencies in the statement prepared by the company's accountant. Include in your answer items that require additional disclosure, either on the face of the statement of in a note.
Explanation / Answer
1. Land held for sale should be listed as a current asset, either on its own or in the investment section.
2. $50K note receivable should be included as a long-term asset. The $3K accrued interest should be a current asset.
3. Interest payable should be a current liability. $20K of the note payable shold be listed as a current liability, as it is due in the subsequent year. The remaining $80K should remain as a long-term liability.
4. Balance sheet presentation appears OK, but disclosure of details of investmenst should be included in a note.
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