The financial statement was prepared by employees of your client, Linus Construction Company.

The statement is not accompanied by footnotes, but you have discovered the following:

a. The average completion period for the company's jobs is 18 months. The company's method of journalizing contract transactions is summarized in the following pro-forma entries.

b. Linus both owns and leases equipment used on construction jobs. Typ¬ ically, its equipment lease contracts provide that Linus may return the equipment upon completion of a job or may apply all rentals in full toward purchase of the equipment. About 70 percent of lease rental payments made in the past have been applied to the purchase of equip¬ ment. While leased equipment is in use, rents are charged to the account payments made on leased equipment (except for $1 balance) and to jobs on which the equipment has been used. In the event of purchase, the bal¬ ance in the payments made on leased equipment account is transferred to the machinery and equipment account and the depreciation and other related accounts are corrected.

c. Management is unable to develop dependable estimates of costs to com¬ plete contracts in progress.
Required:

a. Identify the weaknesses in the financial statement.

b. For each item identified in part (a), indicate the preferable treatment and explain why the treatment is preferable.

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Linus Construction Company Statement of Financial Position October 31,200 Current Assets: Cash $182,200 Accounts receivable (less allowance of $14,000 for 220,700 doubtful accounts) Materials, supplies, labor and overhead charged to 2,026,000 construction 288,000. Materials and supplies not charged to construction Deposits made to secure performance of contracts Less Current Liabilities: Accounts payable to subcontractors Payable for materials and supplies Accrued payroll Accrued interest on mortgage note Estimated taxes payable 360,000 $3,076,900 $141,100 65,300 8,260 12,000 66,000 292,660 Net working capital $2,784,240 Property plant and Equipment (at cost): Cost Depreciation Value Land and $983,300 $310,000 $673,300 equipment Machinery and 905,000 338,000 567,000 equipment Payments made 230,799 230,699 1 on leased equipment