Problem 24-1 Your firm has been engaged to examine the financial statements of A
ID: 2484185 • Letter: P
Question
Problem 24-1
Your firm has been engaged to examine the financial statements of Almaden Corporation for the year 2014. The bookkeeper who maintains the financial records has prepared all the unaudited financial statements for the corporation since its organization on January 2, 2009. The client provides you with the information below.
ALMADEN CORPORATION
BALANCE SHEET
DECEMBER 31, 2014
Assets
Liabilities
Current assets
$1,888,060
Current liabilities
$966,030
Other assets
5,184,278
Long-term liabilities
1,478,320
Capital
4,627,988
$7,072,338
$7,072,338
An analysis of current assets discloses the following.
Cash (restricted in the amount of $302,910 for plant expansion)
$573,080
Investments in land
186,900
Accounts receivable less allowance of $30,230
482,810
Inventories (LIFO flow assumption)
645,270
$1,888,060
Other assets include:
Prepaid expenses
$63,650
Plant and equipment less accumulated depreciation of $1,434,500
4,135,900
Cash surrender value of life insurance policy
84,990
Unamortized bond discount
37,728
Notes receivable (short-term)
162,410
Goodwill
253,330
Land
446,270
$5,184,278
Current liabilities include:
Accounts payable
$511,120
Notes payable (due 2017)
157,990
Estimated income taxes payable
145,250
Premium on common stock
151,670
$966,030
Long-term liabilities include:
Unearned revenue
$490,250
Dividends payable (cash)
202,070
8% bonds payable (due May 1, 2019)
786,000
$1,478,320
Capital includes:
Retained earnings
$2,774,888
Capital stock, par value $10; authorized 200,000 shares, 185,310 shares issued
1,853,100
$4,627,988
The supplementary information below is also provided.
1.
On May 1, 2014, the corporation issued at 95.2, $786,000 of bonds to finance plant expansion. The long-term bond agreement provided for the annual payment of interest every May 1. The existing plant was pledged as security for the loan. Use the straight-line method for discount amortization.
2.
The bookkeeper made the following mistakes.
(a)
In 2012, the ending inventory was overstated by $184,170. The ending inventories for 2013 and 2014 were correctly computed.
(b)
In 2014, accrued wages in the amount of $227,460 were omitted from the balance sheet, and these expenses were not charged on the income statement.
(c)
In 2014, a gain of $177,860 (net of tax) on the sale of certain plant assets was credited directly to retained earnings.
3.
A major competitor has introduced a line of products that will compete directly with Almaden’s primary line, now being produced in a specially designed new plant. Because of manufacturing innovations, the competitor’s line will be of comparable quality but priced 50% below Almaden’s line. The competitor announced its new line on January 14, 2015. Almaden indicates that the company will meet the lower prices that are high enough to cover variable manufacturing and selling expenses, but permit recovery of only a portion of fixed costs.
4.
You learned on January 28, 2015, prior to completion of the audit, of heavy damage because of a recent fire to one of Almaden’s two plants; the loss will not be reimbursed by insurance. The newspapers described the event in detail.
Analyze the above information to prepare a corrected balance sheet for Almaden in accordance with proper accounting and reporting principles. Prepare a description of any notes that might need to be prepared. The books are closed and adjustments to income are to be made through retained earnings.(List current assets in order of liquidity. Enter account name only and do not provide descriptive information.)
ALMADEN CORPORATION
BALANCE SHEET
DECEMBER 31, 2014
Assets
Liabilities
Current assets
$1,888,060
Current liabilities
$966,030
Other assets
5,184,278
Long-term liabilities
1,478,320
Capital
4,627,988
$7,072,338
$7,072,338
Explanation / Answer
1. Discount on issue of Bond is $39,630 which can be amortized on straight line basis. So, Discount amount is to be amortized at the rate of $7872 each year, this amount is to be shown in income statement as an expense, so retianed earnings will be reduced by $7872 for the year 2014 -15 and balance amount i.e $ 31,758 will be shown as fictitious asset. Due to this, Retained earnings will be reduced by discount amount of $7872
2.(a) For the year 2012,closing stock is overvalued by 184,170, so net profit will be overstated for the year 2012 and Opeinng stock of 2013 is overstated, then porfit of that year will be reduced by 184,170, so no increase or decrease in profits due to overvaluaton of closing stock for the year 2014
(b) Accrued wages $227,460 are omitted to record in both income statement and Balance sheet, due to this retained earnings will be reduced by $227,460
(c) Gain on sale of Plant assets $177,860 was credited directly Retained earnings account and omitted to to show as a capital profit. due to this error net income will be understated.
3. Competitor reduced his cost to the extent of 50% compared to Almaden. Almaden also shoudl try to reduce variable expenses instead of Fixed cost
4. Loss occured due to fire accedent is a an event occured after the balance sheet date, so it is to be reported in Auditors report. As insurance company is not given insurance amount, this loss is to be provided in income statement and due to this loss retained earnings will be reduced.
CURRENT ASSETS IN ORDER OF LIQUIDITY:
Cash
Accounts Receivabls
Inventories
Investments
Retained Earnings:
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