On 1/1/X1, P purchased 40%of S Company for $440,000. At the time of purchase, S reported Capital Stock of $500,000 and Retained Earnings of $500,000. An appraisal of Ss assets indicated that land was under-valued by $20,000 and equipment was over-valued by $10,000. No other assets were found to be mis-valued. S uses the straight-line method for depreciating its equipment and the remaining useful life of the equipment is five years

Professor Beck Spring 2017 Accountancy 401 Accounting Error Problem On 1/1/X1, P purchased 40%of S Company for $440,000. At the time of purchase, S reported Capital Stock of $500,000 and Retained Earnings of $500,000. An appraisal of S's assets indicated that land was under-valued by $20,000 and equipment was over-valued by $10,000. No other assets were found to be mis-valued. S uses the straight-line method for depreciating its equipment and the remaining useful life of the equipment is five years During year X1, P reported a Net income of $200,000 while S reported a net income of $100,000 and paid cash dividends of $50,000. During year X2, P reported a net income of $100,000 while S reported a net income of $150,000 and paid cash dividends of $80,000. In January of X3, Gateway CPA's commenced an audit of P's financial statements for year X2. Gateway's audit revealed that P's investment in S was valued at $440,000 and that P had recognized investment income of $32,000 in year X2. Gateway's auditors then went back to examine P's income statement for year X1 and discovered that P had recorded income of $20,000 from its investment in S. P's financial statements for year X1 had not been audited. Gateway's audit manager discussed the investment accounting with P's accountant did not realize that accounting rules depended on the size of the investment. Required: 1. What problems were revealed by Gateway's audit? 2. Assume that you are Gateway's audit partner, what book entries should you ask Gateway to make in January of X3? (Show your supporting calculations.) 3. What disclosures, if any, should Gateway ask P to make assuming that comparative financial statements will be presented for years X1 and X2? 4. Assume that P's accountant makes the entries requested in part 2 and the proposed disclosures in part 3. What type of audit report should Gateway issue? You may assume that no other accounting problems were identified during Gateway's audit of P's year X2 financial statements and that P is a private company. State any underlying assumptions that you are making. 5. Assume that P is a public company. How if at all would this affect your audit report