Explanation of audit legends:

> Traced to 20X8 audit workpapers and 1/1/X9 ledger balance

W Examined work orders and traced:

Materials to materials requisitions and invoices

Direct labor to time cards

Direct and indirect overhead to company analyses

E Examined underlying documentation

# Recalculated

* Traced to 12/31/X9 general ledger

& Traced to plant assets ledger

R Examined remittance advice and bank statement

% Traced to 12/31/X8 plant assets ledger and calculated

1/2 year's depreciation for 20X9

QUESTION:

2. In recording the 20X9 disposals, Janel James, Bronys Bikes plant assets accountant, miscalculated the accumulated depreciation on the assets sold and thereby overstated the gain on disposal by $3,090,000. Draft Audit Adjustment 10 at the bottom of WP 11.4 to correct for this misstatement.

In addition, James did not change the standard journal entry for monthly depreciation to reflect additions and disposals during the year. As a result depreciation expense for the year is understated by $800,000. Bronys Bikes depreciates factory equipment on a straight-line basis over a ten-year estimated useful life with zero salvage value. One-half years depreciation is taken on all additions and disposals. Draft Audit Adjustment 11 at the bottom of WP 11.4 to reflect the depreciation understatement.

In recording the under-depreciation, debit account 5300 Cost of Goods Sold - Pikes Peak Mountain Bike, inasmuch as all overhead accounts have been closed. Any further adjustments, therefore, must be reflected in the cost of sales accounts.

WP 11 Brony's Bikes Plant Assets and Accumulated Depreciation - Lead Schedule December 31, 20X9 Prepared by: Date: Reviewed by: Date: ASSETS 12/3120X8 Balance 20X9 Additions 20x9 Disposals 1213120x9 Balance Audit Adjustments Audited Balance Workpaper Reference $0 30 $0 Land Factory Building Warehouses and Sales Offices Factory Equipment Office Building Office Fixtures and Equipment Autos and Trucks $4.000.000 $50,000,000 $200,000,000 $320.000.000 $20,000,000 $9.000.000 $900,000 $89,860,000 ($49,860,000) $4,000,000 $50.000.000 $200,000,000 $360,000,000 $20.000.000 $10,000,000 $1,000,000 (1) $4,000,000 $50,000,000 $200,000,000 $360,000,000 $20,000,000 $10,000,000 $1,000,000 11.1 11.2 11.3 11.4 11.5 11.6 $0 ($1,000,000) $2.000.000 $100,000 $0 11.7 $603.900,000 $91.960,000 ($50,860,000) $645,000,000 $645,000,000 EEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEE = ACCUMULATED DEPRECIATION 12/3120X8 Balance 20X9 Additions 20x9 Disposals 1213120x9 Balance Audit Adjustments Audited Balance Workpaper Reference Factory Building Warehouses and Sales Offices Factory Equipment $12,140,000 $95.000.000 $147.460,000 $2,000,000 $10,000,000 $42.060,000 $14,140,000 $105,000,000 $144,660.000 $14,140,000 $105,000,000 112 113 ($44.860,000) (10) 11.4 Office Building Office Fixtures and Equipment Autos and Trucks $7.200.000 $5,075,000 $300,000 $800,000 $1.875,000 $320,000 ($800,000) $8,000,000 $6,150,000 $620,000 $144,660,000 $8,000,000 $6,150,000 $620,000 $267,175,000 $57,055,000 ($45,660,000) $278,570,000 $278,570,000 EEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEE WP 11.4 Brony's Bikes Factory Equipment - Additions and Disposals December 31, 20X9 Prepared by: Date: Reviewed by: Date: ACCUMULATED DEPRECIATION ASSET GAIN(LOSS) ON DISPOSAL $320,000,000 > $147,460,000 > 123VX8 Audited Balance 20x9 Additions: Assembly Line #1 refurbishing Assembly Line #2 refurbishing Ransport computerized paint system Welding equipment for lines 1 and 2 Computerized quality control system Stamping and forming equipment for one-piece frame Additions sampled (See WP 11.3) $15,600,000 $22,340,000 $16,800,000 $5,760,000 $11,110,000 W W E E E $5,650,000 E $12,600,000 $409,860,000 Beginning Balance plus Additions 20x9 Disposals: Assembly Lines 1 and 2 equipment Paint system Welding equipment Presses and forming equipment ($28,360,000) ($12,630,000) ($3,990,000) ($4,880,000) ($26,345,000) ($12,360,000) ($2,955,000) ($3,200,000) $4,000,000 20x9 Depreciation Provision $12,060,000 # $144,660,000 - 1213VX9 Ledger Balance $360,000,000 * $4,000,000 - Audit Adjustments: AJE 1 AJE 10 AJE 11 1213VX9 Audited Balance $360,000,000 $144,660,000 $4,000,000 WP 11 WP 11 Recalculation of gain on disposal: Brony's Bikes Journal Entry: Cost of equipment acquired in various years Accumulated depreciation (including 12 year in 2007) $49,860,000 & $41,770,000 % $9,000,000 $14,860,000 Book value Selling price $8,090,000 $9,000,000 R Cash Accumulated Depreciation-FE Factory Equipment Gain on Disposal $49,860,000 $4,000,000 Gain Per general ledger $910,000 $4,000,000 Correct Entry: ($3,090,000) $9,000,000 $41,770,000 Audit Adjustment No. 10 Cash Accumulated Depreciation-FE Factory Equipment Gain on Disposal $49,860,000 $910,000 9485 Gair Loss on Disposal of Plant Assets 1535 Accumulated Depreciation-Factory Equipment To correct for error in calculating accumulated depreciation on disposals of factory equipment. Audit Adjustment No. 11 5300 Cost of Goods Sold-Pike's Peak Mountain Bike 1535 Accumulated Depreciation Factory Equipment To correct for underdepreciation on the excess of additions over disposals. WP 11 Brony's Bikes Plant Assets and Accumulated Depreciation - Lead Schedule December 31, 20X9 Prepared by: Date: Reviewed by: Date: ASSETS 12/3120X8 Balance 20X9 Additions 20x9 Disposals 1213120x9 Balance Audit Adjustments Audited Balance Workpaper Reference $0 30 $0 Land Factory Building Warehouses and Sales Offices Factory Equipment Office Building Office Fixtures and Equipment Autos and Trucks $4.000.000 $50,000,000 $200,000,000 $320.000.000 $20,000,000 $9.000.000 $900,000 $89,860,000 ($49,860,000) $4,000,000 $50.000.000 $200,000,000 $360,000,000 $20.000.000 $10,000,000 $1,000,000 (1) $4,000,000 $50,000,000 $200,000,000 $360,000,000 $20,000,000 $10,000,000 $1,000,000 11.1 11.2 11.3 11.4 11.5 11.6 $0 ($1,000,000) $2.000.000 $100,000 $0 11.7 $603.900,000 $91.960,000 ($50,860,000) $645,000,000 $645,000,000 EEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEE = ACCUMULATED DEPRECIATION 12/3120X8 Balance 20X9 Additions 20x9 Disposals 1213120x9 Balance Audit Adjustments Audited Balance Workpaper Reference Factory Building Warehouses and Sales Offices Factory Equipment $12,140,000 $95.000.000 $147.460,000 $2,000,000 $10,000,000 $42.060,000 $14,140,000 $105,000,000 $144,660.000 $14,140,000 $105,000,000 112 113 ($44.860,000) (10) 11.4 Office Building Office Fixtures and Equipment Autos and Trucks $7.200.000 $5,075,000 $300,000 $800,000 $1.875,000 $320,000 ($800,000) $8,000,000 $6,150,000 $620,000 $144,660,000 $8,000,000 $6,150,000 $620,000 $267,175,000 $57,055,000 ($45,660,000) $278,570,000 $278,570,000 EEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEE WP 11.4 Brony's Bikes Factory Equipment - Additions and Disposals December 31, 20X9 Prepared by: Date: Reviewed by: Date: ACCUMULATED DEPRECIATION ASSET GAIN(LOSS) ON DISPOSAL $320,000,000 > $147,460,000 > 123VX8 Audited Balance 20x9 Additions: Assembly Line #1 refurbishing Assembly Line #2 refurbishing Ransport computerized paint system Welding equipment for lines 1 and 2 Computerized quality control system Stamping and forming equipment for one-piece frame Additions sampled (See WP 11.3) $15,600,000 $22,340,000 $16,800,000 $5,760,000 $11,110,000 W W E E E $5,650,000 E $12,600,000 $409,860,000 Beginning Balance plus Additions 20x9 Disposals: Assembly Lines 1 and 2 equipment Paint system Welding equipment Presses and forming equipment ($28,360,000) ($12,630,000) ($3,990,000) ($4,880,000) ($26,345,000) ($12,360,000) ($2,955,000) ($3,200,000) $4,000,000 20x9 Depreciation Provision $12,060,000 # $144,660,000 - 1213VX9 Ledger Balance $360,000,000 * $4,000,000 - Audit Adjustments: AJE 1 AJE 10 AJE 11 1213VX9 Audited Balance $360,000,000 $144,660,000 $4,000,000 WP 11 WP 11 Recalculation of gain on disposal: Brony's Bikes Journal Entry: Cost of equipment acquired in various years Accumulated depreciation (including 12 year in 2007) $49,860,000 & $41,770,000 % $9,000,000 $14,860,000 Book value Selling price $8,090,000 $9,000,000 R Cash Accumulated Depreciation-FE Factory Equipment Gain on Disposal $49,860,000 $4,000,000 Gain Per general ledger $910,000 $4,000,000 Correct Entry: ($3,090,000) $9,000,000 $41,770,000 Audit Adjustment No. 10 Cash Accumulated Depreciation-FE Factory Equipment Gain on Disposal $49,860,000 $910,000 9485 Gair Loss on Disposal of Plant Assets 1535 Accumulated Depreciation-Factory Equipment To correct for error in calculating accumulated depreciation on disposals of factory equipment. Audit Adjustment No. 11 5300 Cost of Goods Sold-Pike's Peak Mountain Bike 1535 Accumulated Depreciation Factory Equipment To correct for underdepreciation on the excess of additions over disposals