AC 302 WEEK 10 Willy Exercise 24 Questions AND Problems
Exercise 24 Quentin 2
Your answer is correct
For each of the following subsequent (post-balance-sheet) events, indicate whether a company should (a) adjust the financial statements, (b) disclose in notes to the financial statements, or (c) neither adjust nor disclose.
Sr. No. Subsequent (Post-Balance-Sheet) Events
1. Settlement of federal tax case at a cost considerably in excess of the amount expected at year-end.
2. Introduction of a new product line.
3. Loss of assembly plant due to fire.
4. Sale of a significant portion of the company- assets.
5. Retirement of the company president.
6. Prolonged employee strike.
7. Loss of a significant customer.
8. Issuance of a significant number of shares of common stock.
9. Material loss on a year-end receivable because of a customer- bankruptcy.
10. Hiring of a new president.
11. Settlement of prior year- litigation against the company (no loss was accrued).
12. Merger with another company of comparable size.
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Problem 24-1
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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 $1,888,200 Current liabilities $968,900
Other assets 5,194,244 Long-term liabilities 1,486,220
Capital 4,627,324
$7,082,444 $7,082,444
An analysis of current assets discloses the following.
Cash (restricted in the amount of $302,260 for plant expansion) $571,430
Investments in land 187,880
Accounts receivable less allowance of $30,840 481,890
Inventories (LIFO flow assumption) 647,000
$1,888,200
Other assets include:
Prepaid expenses $62,970
Plant and equipment less accumulated depreciation of $1,445,400 4,146,300
Cash surrender value of life insurance policy 84,930
Unamortized bond discount 38,074
Notes receivable (short-term) 163,140
Goodwill 252,260
Land 446,570
$5,194,244
Current liabilities include:
Accounts payable $512,770
Notes payable (due 2017) 158,550
Estimated income taxes payable 146,480
Premium on common stock 151,100
$968,900
Long-term liabilities include:
Unearned revenue $491,360
Dividends payable (cash) 201,660
8% bonds payable (due May 1, 2019) 793,200
$1,486,220
Capital includes:
Retained earnings $2,767,824
Capital stock, par value $10; authorized 200,000 shares, 185,950 shares issued 1,859,500
$4,627,324
The supplementary information below is also provided.
1. On May 1, 2014, the corporation issued at 95.2, $793,200 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 $184,780. The ending inventories for 2013 and 2014 were correctly computed.
(b) In 2014, accrued wages in the amount of $226,410 were omitted from the balance sheet, and these expenses were not charged on the income statement.
(c) In 2014, a gain of $176,600 (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- primary line, now being produced in a specially designed new plant. Because of manufacturing innovations, the competitor- line will be of comparable quality but priced 50% below Almaden- 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- 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.)
Solution
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Problem 24-1
Cash ($571,430 - $302,260) = $269,170
Inventories (LIFO) = $647,000
Accounts receivable ($481,890 + $30,840) = $512,730
Plant and equipment (pledged as collateral for bonds) ($4,146,300 + $1,445,400) = $5,591,700
Interest payable ($793,200x 8% x 8/12) = $42,304
Notes payable (due 2017) = $158,550
8% bonds payable (secured by plant and equipment) = $793,200
Unamortized bond discount* = $32,997
Common stock, par value $10 per share;
authorized 200,000 shares;185,950shares issued and outstanding = $1,859,500
*Unamortized bond discount = ($38,074÷ 5 = $7,615; $7,615x 8/12 = $5,077; $38,074- $5,077) = $32,997
Retained earnings
Retained earnings $2,767,824
Accrued wages omitted (226,410 )
Accrued interest (42,304 )
Bond amortization (5,077 )
$2,494,033
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. Salaries and wages payable 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. Interest payable on the bonds ($793,200x 8% x 8/12 = $42,304) was never recorded. This amount will also reduce retained earnings. The related discount amortization [($38,074÷ 60) x 8 months = $5,077] 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.
Problem 24-2
Your answer is correct.
Cineplex Corporation is a diversified company that operates in five different industries: A, B, C, D, and E. The following information relating to each segment is available for 2015.
A B C D E
Sales revenue $57,400 $77,200 $588,800 $34,500 $53,400
Cost of goods sold 20,200 57,400 280,000 20,200 31,900
Operating expenses 9,844 57,400 240,700 12,190 18,300
Total expenses 30,044 114,800 520,700 32,390 50,200
Operating profit (loss) $27,356 $(37,600) $68,100 $2,110 $3,200
Identifiable assets $43,700 $87,700 $505,200 $72,600 $57,400
Sales of segments B and C included intersegment sales of $22,450 and $101,640, respectively.
(a) Determine which of the segments are reportable based on the:
Reportable Segment
(1) Revenue test.
(2) Operating profit (loss) test.
(3) Identifiable assets test.
(b) Prepare the necessary disclosures required by GAAP. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)
A B C Other Totals
External Revenues $
$
$
$
$
Intersegment Revenues
Total Revenues
$
Cost of Goods Sold
Operating Expenses
Total Expenses
Operating Profit (Loss) $
$
$
$
$
Identifiable Assets $
$
$
$
$
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Solution
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Problem 24-2
(a) Determination of reportable segments:
1. Revenue test: 10% x $811,300* = $81,130. Only Segment C ($588,800) meets this test.
*$57,400+ $77,200+ $588,800+ $34,500+ $53,400
2. Operating profit test: 10% x ($27,356+ $68,100+ $2,110+ $3,200) =
$10,077. Segments A ($27,356), B ($37,600 absolute value), and C ($68,100) all meet this test.
3. Identifiable assets test: 10% x $766,600** = $76,660. Segments B ($87,700) and C ($505,200) meet this test.
**$43,700+ $87,700+ $505,200+ $72,600+ $57,400
(b)
Reconciliation of revenues
Total segment revenues $811,300
Revenues of immaterial segments (87,900 )
Elimination of intersegment revenues (124,090 )
Revenues from reportable segments $599,310
Reconciliation of profit or loss
Total segment operating profit $63,166
Profits of immaterial segments (5,310 )
Profits from reportable segments $57,856
Reconciliation of assets
Total segment assets $766,600
Assets of immaterial segments (130,000 )
Assets from reportable segments $636,600
USA 
India