Your firm has been engaged to examine the financial statements of Almaden Corpor
ID: 2564017 • Letter: Y
Question
Your firm has been engaged to examine the financial statements of Almaden Corporation for the year 2017. The bookkeeper who maintains the financial records has prepared all the unaudited financial statements for the corporation since its organization on January 2, 2012. The client provides you with the information below.
ALMADEN CORPORATION
BALANCE SHEET
DECEMBER 31, 2017
Assets
Liabilities
The supplementary information below is also provided.
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.
ALMADEN CORPORATION
BALANCE SHEET
DECEMBER 31, 2017
Assets
Liabilities
Current assets $1,881,100 Current liabilities $962,400 Other assets 5,171,400 Long-term liabilities 1,439,500 Capital 4,650,600 $7,052,500 $7,052,500Explanation / Answer
ALMADEN CORPORATION
Balance Sheet
December 31, 2017
Assets
Current assets
Cash ($571,000 – $300,000)............................................. $ 271,000
Accounts receivable
($480,000 + $30,000)................................. $ 510,000
Less allowance for
doubtful accounts............................... 30,000 480,000
Notes receivable................................................................. 162,300
Inventories (LIFO)............................................................... 645,100
Prepaid expenses................................................................ 62,400
Total current assets........................................... $1,620,800
Long-term investments
Investments in land........................................................... 185,000
Cash surrender value of
life insurance policy....................................................... 84,000
Cash restricted for plant
expansion......................................................................... 300,000 569,000
Property, plant, and equipment
Plant and equipment
(pledged as collateral
for bonds)
($4,130,000 + $1,430,000)........................... 5,560,000
Less accumulated
depreciation........................................ 1,430,000 4,130,000
Land..................................................................................... 446,200 4,576,200
Intangible assets
Goodwill, at cost................................................................. 252,000
Total assets......................................................... $7,018,000
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable....................................... $ 510,000
Unearned revenue...................................... 489,500
Dividends payable...................................... 200,000
Accrued wages payable.............................. 225,000
Estimated income taxes
payable..................................................... 145,000
Accrued interest payable
($750,000 X 8% X 8/12)......................... 40,000
Total current liabilities............. $1,609,500
Long-term liabilities
Notes payable (due 2013).......................... 157,400
8% bonds payable (secured
by plant and equipment)......................... $ 750,000
Less unamortized bond
discount*.......................................... 29,900 720,100 877,500
Total liabilities........................... 2,487,000
Stockholders’ equity
Capital stock, par value
$10 per share; authorized
200,000 shares; 184,000
shares issued and
outstanding.............................................. 1,840,000
Paid-in capital in excess of par................. 150,000 1,990,000
Retained earnings...................................... 2,541,000**
Total stockholders’
equity....................................... 4,531,000
Total liabilities and
stockholders’ equity............... $7,018,000
**($34,500 ÷ 5 = $6,900; $6,900 X 8/12 = $4,600; $34,500 – $4,600 = $29,900)
**Retained earnings $2,810,600
Accrued wages omitted (225,000)
Accrued interest (40,000)
Bond amortization (4,600)
$2,541,000
Additional comments:
1. The information related to the competitor should be disclosed because this innovation may have a significant effect on the company. The value of the inventory is overstated because of the need to reduce selling prices. This factor along with the net realizable value of the inventory should be disclosed.
2. The pledged assets should be described in the balance sheet as indicated or in a footnote.
3. The error in calculating inventory will have been offset, so no adjustment is needed.
4. Accrued wages is included as a liability and retained earnings is reduced.
5. The fact that the gain on sale of certain plant assets was credited directly to retained earnings has no effect on the balance sheet presentation.
6. Technically, the plant and equipment account should be separately disclosed and depreciation computed on each item individually. However, the information to divide the accounts was not given in this problem.
7. Accrued interest on the bonds ($750,000 X 8% X 8/12 = $40,000) was never recorded. This amount will also reduce retained earnings. The related discount amortization [($34,500 ÷ 60) X 8 months = $4,600] will reduce both the discount account and retained earnings.
8. Since the loss from heavy damage was caused by a fire after the balance sheet date, this event does not reflect conditions existing at that date. Thus, adjustment of the financial statements is not necessary. However, the loss should be disclosed in a note, especially since users of the financial statements who may have read about the fire in the newspaper, would likely be looking for disclosure of the financial implications.
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