Question
Claytonhill Beverages Ltd. is 100-percent owned by Buzz Bottling. While the company has in the past been profitable, it incurred a loss for the year
Claytonhill Beverages Ltd. is 100-percent owned by Buzz Bottling. While the company has in the past been profitable, it incurred a loss for the year ended December 31, 2020. The parent company, Buzz Bottling, has indicated that if Claytonhill incurs another loss, it will put the subsidiary up for sale. In response, Claytonhill is looking to expand its market share and therefore its profitability by performing private labelling for a nationwide supermarket chain, ValueFoods Inc. Private labelling involves producing and packaging pop and other non-alcoholic beverages under the ValueFoods label. However, in order to proceed with this endeavour, Claytonhill needs a packaging facility dedicated exclusively to co-packing. To finance this expansion, the company has applied to the Better Business Bank for financing.
The bank has indicated that, before it will approve the loan application, it would like to see audited financial statements for 2020. It also wants to ensure the entity has a current ratio of 2:1.
Claytonhill Beverages has provided you, its new auditor, with the draft (unaudited) financial statements in figure 4.10:
Unaudited financial statements for Claytonhill Beverages
Income Statement for the Year Ended December 31, 2020 (partial) | |
Revenue | |
Sales | $2,057,505 |
Cost of goods sold | 1,445,450 |
Gross margin | 612,055 |
Less: | |
General and administration costs (including bonuses of $100,000) | 775,899 |
Net loss before tax | $(163,844) |
Balance Sheet as at December 31, 2020 | |
Assets | |
Current assets | |
Cash | $179,825 |
Accounts receivable, net | 64,475 |
Prepaid expenses | 3,004 |
Inventory | 1,507,413 |
Total current assets | 1,754,717 |
Property, plant and equipment | |
Land | 2,004,933 |
Building, net | 964,224 |
Office furniture and equipment, net | 85,106 |
Total property, plant and equipment | 3,054,263 |
Total assets | $4,808,980 |
Liabilities | |
Current liabilities | |
Accounts payable | $799,255 |
Other accrued expenses | 44,875 |
Warranty provision | 9,456 |
Current portion long-term debt | 25,000 |
Total current liabilities | 878,586 |
Long-term liabilities | |
Bank loans | 2,200,000 |
Total long-term liabilities | 2,200,000 |
Total liabilities | 3,078,586 |
Equity | |
Common shares | 248,000 |
Retained earnings | 1,482,394 |
Total equity | 1,730,394 |
Liabilities and equity | $4,808,980 |
Required
Calculate the three levels of materiality.
Planning Materiality | $ | |
---|---|---|
Performance Materiality | $ | |
Specific Materiality | $ |
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