pick 3 questions to ask about additional information needed from Jerry

do you see any issues?

what additional information do you need?

HYDROQUAL, INC. Preliminary Financials 20X2 In early December 20X2, Rick Bailey called Tom Fasbee to tell him that, in addition to meeting several other criteria, HydroQual's loan covenants required annual financial statements be submitted to the bank. Regina Sontag at Midwest American Bank had reminded Rick that the statements must be reviewed by a CPA and that the review and related report should be comparable to what Dunes & Driftwood had done last year. In addition, the bank requested comparative financial statements, including notes that provide the fair value of all financial instruments and information on major customers. Rick wanted to know if Dunes & Driftwood would do the work again. Tom said his firm would be delighted to do it. Rick then requested that Tom send out the same person. He indicated that HydroQual's people knew you and had confidence in your ability. Tom indicated that Rick's staffing request would be "no problem." You, of course, were happy to be called on again. You made arrangements with Jerry Loos to obtain financial statements as early as possible in 20X3. You received HydroQual's 20X2 financial statements on Wednesday, January 13. A preliminary review revealed the large crew truck investment made earlier in the year. You decided that a quick stop at Martha Mason's office would be appropriate. Martha represented Dunes & Driftwood on HydroQual's tax work. You asked Martha how the crew trucks would be depreciated for tax purposes. She indicated that they would be depreciated using the 5-year half year convention Modified Accelerated Cost Recovery System (MACRS) schedule. She also reminded you that the shop equipment purchased last year is being depreciated using the 7-year half year convention MACRS schedule. She also noted that she understood that all items classified as property, plant, and equipment are depreciated to the nearest full year for book purposes. Martha had a number of questions for you on another client, so you completed your conversation over lunch. Before leaving, she reminded you that the MACRS depreciation schedules can be found on the IRS.gov website. You planned to spend the afternoon reviewing HydroQual's preliminary financial statements in detail and get questions to Jerry by Thursday. Jerry then would prepare responses so that you could begin the review on the following Monday. REQUIRED: The journal entries and financial statements prepared by Jerry Loos are attached. The crew truck cost schedule you recommended Jerry prepare is also included. You will find that it is not at all clear how Jerry calculated the numbers on the schedule. Review the client's data and prepare a list of additional information items needed from Jerry. Be sure to include any necessary questions to get the information needed to reconcile each truck schedule number, and to add any needed items. Be as specific as possible and phrase your requests in the form of questions as they normally would be asked of a client. Be sure to provide a written reason that you are asking each question and also provide a reference to the FASB codification where appropriate. Jerry assured you that the bank account has been reconciled and that outstanding checks account for the only reconciling items. He also indicated that all vendor invoices reflecting business through December 31, 20X2 have been booked. HYDROQUAL, INC. BALANCE SHEET DECEMBER 31, 20X2 ASSETS 20x2 $ CURRENT ASSETS Cash Accounts receivable Supplies on hand Prepaid insurance Total Current Assets 314,910 153,500 6,860 2,654 477,924 LONG-TERM ASSETS Equipment Accumulated depreciation equipment Vehicles Accumulated depreciation vehicles Leased Shop Equipment NOL tax benefit NOL valuation allowance License Total Long-Term Assets 44,500 (12,714) 266,650 (40,000) 10.750 3,594 (1.258) 39,000 310,522 TOTAL ASSETS 788,447 LIABILITES AND STOCKHOLDERS' EQUITY $ LIABILITIES CURRENT LIABILITIES Accounts payable Wages payable Taxes payable Total Current Liabilities 14,303 10,860 77,927 103,089 LONG TERM LIABILITIES Long-term lease payable Note payable Total Long Term Liabilities 6,985 240,000 246,985 350,074 Total Liabilities STOCKHOLDERS' EQUITY Common stock Retained earnings Total Stockholders' Equity 160,000 278,372 438,372 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 788,447 HYDROQUAL, INC. STATEMENT OF INCOME FOR THE YEAR ENDING DECEMBER 31, 20X2 Service revenue 20X2 1,345,500 $ Cost of services sold 636,963 Gross profit 708,537 Operating expenses Selling and administrative Depreciation and amortization Total operating expenses 288,100 49,357 337,457 Operating income before income taxes 371,079 Income tax expense (77,927) Net income $ 293,153 HYDROQUAL, INC. JOURNAL ENTRIES DECEMBER 31, 20X2 JE# 1 CREDIT DATE 1/1.X2 ACCTE ACCOUNT NAME 563 SERVICE COSTS-INDIRECT-LEASE EXPENSE-SHOP BLDG 602 SELLING & ADMIN-LEASE EXPENSE-OFFICE BLOG 101 CASH To record and allocate new building lease payment. DEBIT 31,667 6,333 38,000 N 2 2 1/1/0X2 10.750 190 409 101 RIGHT-OF-USE ASSET-LEASE-SHOP EQUIPMENT LEASE PAYABLE-SHOP EQUIPMENT CASH To record new shop equipment lease and first payment 6,985 3,755 3 2/1/X2 240,000 101 401 CASH LONG-TERM DEBT-NOTES To record issuance of long-term notes payable 240,000 - 4 2/1/X2 240,000 181 101 VEHICLES CASH To record purchase of two new trucks. 240,000 5 101 105 505 255,000 1,090,500 CASH ACCOUNTS RECEIVABLE SERVICE REVENUE FROM CONTRACTS WITH CUSTOMERS To record revenue from maintenance contracts 1,345,500 6 181 561 101 305 154,230 3,410 VEHICLES 7,040 SERVICE COSTS-INDIRECT-SHOP WAGES 150,600 CASH WAGES PAYABLE To record accrual and payment of shop wages, including wages capitalized to trucks. SERVICE COSTS-DIRECT-CREW WAGES 351, 195 WAGES PAYABLE 15,960 CASH WAGES PAYABLE To record accrual and payment of crew wages. 7 560 305 101 305 359,714 7450 8 40,341 553 101 SERVICE COSTS-DIRECT-FUEL CASH To record purchase and payment of truck fuel. 40,341 9 1019,500 101 105 CASH ACCOUNTS RECEIVABLE To record receipts on account. 1,019,500 10 54,140 302 101 ACCTS PAY-SUPPLIERS-OTHER COSTS CASH To record payment on account 54,140 11 22,780 552 101 SERVICE COSTS-DIRECT-LEASE EXPENSE-TRUCKS CASH To record rent payment for maintenance trucks. 22,780 12 1,553 181 563 VEHICLES SERVICE COSTS-INDIRECT-LEASE EXPENSE-SHOP BLDG To capitalize part of shop rent to trucks. 1,553 13 181 631 611 612 609 615 607 101 HYDROQUAL, INC. JOURNAL ENTRIES DECEMBER 31, 20X2 (cont.) VEHICLES 1,120 SELLING & ADMINISTRATIVE-OTHER 7,110 SELLING & ADMIN-OFFICERS SALARIES 138,880 SELLING & ADMIN-OTHER SALARIES 54,600 SELLING & ADMIN-PROFESSIONAL FEES 6,300 SELLING & ADMIN-PAYROLL AND OTHER TAXES 57,675 SELLING & ADMIN-SUPPLIES 14,500 CASH To record accrual and payment of S&A expenses, including salary capitalized to trucks 280,185 14 181 562 601 101 VEHICLES 662 SERVICE COSTS-INDIRECT-SHOP UTILITIES 12,846 SELLING & ADMIN-UTILITIES 2,702 CASH To record accrual and payment of utilities, including amount capitalized to trucks. 16.210 15 181 564 302 VEHICLES 16,275 SERVICE COSTS-INDIRECT-SUPPLIES 32,108 ACCTS PAY-SUPPLIERS-OTHER COSTS To record purchase of supplies, and to capitalize parts used for truck modifications 48 383 16 12/3102 3,020 129 564 SUPPLIES ON HAND SERVICE COSTS-INDIRECT-SUPPLIES To adjust to ending supplies inventory count 3,020 17 12/31002 3,000 710 197 AMORTIZATION OF LICENSING COSTS LICENSE To record amortization of losing costs 3,000 18 12/312 40,000 701 182 TRUCK DEPRECIATION VEHICLES-ACCUMULATED DEPRECIATION To record depreciation expense on trucks 40,000 19 12/3102 6,357 704 172 EQUPMENT DEPRECIATION EQUPMENT-ACCUMULATED DEPRECIATION To record depreciation expense on shop equipment 6,357 20 12/3172 77,927 821 314 INCOME TAX EXPENSE INCOME TAX PAYABLE To record income tax expense at standarytale of 21% 77927 Totals 4,012 449 4012449 $ 240.000 HYDROQUAL, INC. Crew Trucks Cost Schedule 20X2 Initial investment, Dealer 1 Additions: Shop crew labor Materials Planning and supervision Shop rent allocation Shop utilities allocation Crew Truck Cost 7,040 16.275 1.120 1,553 662 $ 266.650 HYDROQUAL, INC. Preliminary Financials 20X2 In early December 20X2, Rick Bailey called Tom Fasbee to tell him that, in addition to meeting several other criteria, HydroQual's loan covenants required annual financial statements be submitted to the bank. Regina Sontag at Midwest American Bank had reminded Rick that the statements must be reviewed by a CPA and that the review and related report should be comparable to what Dunes & Driftwood had done last year. In addition, the bank requested comparative financial statements, including notes that provide the fair value of all financial instruments and information on major customers. Rick wanted to know if Dunes & Driftwood would do the work again. Tom said his firm would be delighted to do it. Rick then requested that Tom send out the same person. He indicated that HydroQual's people knew you and had confidence in your ability. Tom indicated that Rick's staffing request would be "no problem." You, of course, were happy to be called on again. You made arrangements with Jerry Loos to obtain financial statements as early as possible in 20X3. You received HydroQual's 20X2 financial statements on Wednesday, January 13. A preliminary review revealed the large crew truck investment made earlier in the year. You decided that a quick stop at Martha Mason's office would be appropriate. Martha represented Dunes & Driftwood on HydroQual's tax work. You asked Martha how the crew trucks would be depreciated for tax purposes. She indicated that they would be depreciated using the 5-year half year convention Modified Accelerated Cost Recovery System (MACRS) schedule. She also reminded you that the shop equipment purchased last year is being depreciated using the 7-year half year convention MACRS schedule. She also noted that she understood that all items classified as property, plant, and equipment are depreciated to the nearest full year for book purposes. Martha had a number of questions for you on another client, so you completed your conversation over lunch. Before leaving, she reminded you that the MACRS depreciation schedules can be found on the IRS.gov website. You planned to spend the afternoon reviewing HydroQual's preliminary financial statements in detail and get questions to Jerry by Thursday. Jerry then would prepare responses so that you could begin the review on the following Monday. REQUIRED: The journal entries and financial statements prepared by Jerry Loos are attached. The crew truck cost schedule you recommended Jerry prepare is also included. You will find that it is not at all clear how Jerry calculated the numbers on the schedule. Review the client's data and prepare a list of additional information items needed from Jerry. Be sure to include any necessary questions to get the information needed to reconcile each truck schedule number, and to add any needed items. Be as specific as possible and phrase your requests in the form of questions as they normally would be asked of a client. Be sure to provide a written reason that you are asking each question and also provide a reference to the FASB codification where appropriate. Jerry assured you that the bank account has been reconciled and that outstanding checks account for the only reconciling items. He also indicated that all vendor invoices reflecting business through December 31, 20X2 have been booked. HYDROQUAL, INC. BALANCE SHEET DECEMBER 31, 20X2 ASSETS 20x2 $ CURRENT ASSETS Cash Accounts receivable Supplies on hand Prepaid insurance Total Current Assets 314,910 153,500 6,860 2,654 477,924 LONG-TERM ASSETS Equipment Accumulated depreciation equipment Vehicles Accumulated depreciation vehicles Leased Shop Equipment NOL tax benefit NOL valuation allowance License Total Long-Term Assets 44,500 (12,714) 266,650 (40,000) 10.750 3,594 (1.258) 39,000 310,522 TOTAL ASSETS 788,447 LIABILITES AND STOCKHOLDERS' EQUITY $ LIABILITIES CURRENT LIABILITIES Accounts payable Wages payable Taxes payable Total Current Liabilities 14,303 10,860 77,927 103,089 LONG TERM LIABILITIES Long-term lease payable Note payable Total Long Term Liabilities 6,985 240,000 246,985 350,074 Total Liabilities STOCKHOLDERS' EQUITY Common stock Retained earnings Total Stockholders' Equity 160,000 278,372 438,372 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 788,447 HYDROQUAL, INC. STATEMENT OF INCOME FOR THE YEAR ENDING DECEMBER 31, 20X2 Service revenue 20X2 1,345,500 $ Cost of services sold 636,963 Gross profit 708,537 Operating expenses Selling and administrative Depreciation and amortization Total operating expenses 288,100 49,357 337,457 Operating income before income taxes 371,079 Income tax expense (77,927) Net income $ 293,153 HYDROQUAL, INC. JOURNAL ENTRIES DECEMBER 31, 20X2 JE# 1 CREDIT DATE 1/1.X2 ACCTE ACCOUNT NAME 563 SERVICE COSTS-INDIRECT-LEASE EXPENSE-SHOP BLDG 602 SELLING & ADMIN-LEASE EXPENSE-OFFICE BLOG 101 CASH To record and allocate new building lease payment. DEBIT 31,667 6,333 38,000 N 2 2 1/1/0X2 10.750 190 409 101 RIGHT-OF-USE ASSET-LEASE-SHOP EQUIPMENT LEASE PAYABLE-SHOP EQUIPMENT CASH To record new shop equipment lease and first payment 6,985 3,755 3 2/1/X2 240,000 101 401 CASH LONG-TERM DEBT-NOTES To record issuance of long-term notes payable 240,000 - 4 2/1/X2 240,000 181 101 VEHICLES CASH To record purchase of two new trucks. 240,000 5 101 105 505 255,000 1,090,500 CASH ACCOUNTS RECEIVABLE SERVICE REVENUE FROM CONTRACTS WITH CUSTOMERS To record revenue from maintenance contracts 1,345,500 6 181 561 101 305 154,230 3,410 VEHICLES 7,040 SERVICE COSTS-INDIRECT-SHOP WAGES 150,600 CASH WAGES PAYABLE To record accrual and payment of shop wages, including wages capitalized to trucks. SERVICE COSTS-DIRECT-CREW WAGES 351, 195 WAGES PAYABLE 15,960 CASH WAGES PAYABLE To record accrual and payment of crew wages. 7 560 305 101 305 359,714 7450 8 40,341 553 101 SERVICE COSTS-DIRECT-FUEL CASH To record purchase and payment of truck fuel. 40,341 9 1019,500 101 105 CASH ACCOUNTS RECEIVABLE To record receipts on account. 1,019,500 10 54,140 302 101 ACCTS PAY-SUPPLIERS-OTHER COSTS CASH To record payment on account 54,140 11 22,780 552 101 SERVICE COSTS-DIRECT-LEASE EXPENSE-TRUCKS CASH To record rent payment for maintenance trucks. 22,780 12 1,553 181 563 VEHICLES SERVICE COSTS-INDIRECT-LEASE EXPENSE-SHOP BLDG To capitalize part of shop rent to trucks. 1,553 13 181 631 611 612 609 615 607 101 HYDROQUAL, INC. JOURNAL ENTRIES DECEMBER 31, 20X2 (cont.) VEHICLES 1,120 SELLING & ADMINISTRATIVE-OTHER 7,110 SELLING & ADMIN-OFFICERS SALARIES 138,880 SELLING & ADMIN-OTHER SALARIES 54,600 SELLING & ADMIN-PROFESSIONAL FEES 6,300 SELLING & ADMIN-PAYROLL AND OTHER TAXES 57,675 SELLING & ADMIN-SUPPLIES 14,500 CASH To record accrual and payment of S&A expenses, including salary capitalized to trucks 280,185 14 181 562 601 101 VEHICLES 662 SERVICE COSTS-INDIRECT-SHOP UTILITIES 12,846 SELLING & ADMIN-UTILITIES 2,702 CASH To record accrual and payment of utilities, including amount capitalized to trucks. 16.210 15 181 564 302 VEHICLES 16,275 SERVICE COSTS-INDIRECT-SUPPLIES 32,108 ACCTS PAY-SUPPLIERS-OTHER COSTS To record purchase of supplies, and to capitalize parts used for truck modifications 48 383 16 12/3102 3,020 129 564 SUPPLIES ON HAND SERVICE COSTS-INDIRECT-SUPPLIES To adjust to ending supplies inventory count 3,020 17 12/31002 3,000 710 197 AMORTIZATION OF LICENSING COSTS LICENSE To record amortization of losing costs 3,000 18 12/312 40,000 701 182 TRUCK DEPRECIATION VEHICLES-ACCUMULATED DEPRECIATION To record depreciation expense on trucks 40,000 19 12/3102 6,357 704 172 EQUPMENT DEPRECIATION EQUPMENT-ACCUMULATED DEPRECIATION To record depreciation expense on shop equipment 6,357 20 12/3172 77,927 821 314 INCOME TAX EXPENSE INCOME TAX PAYABLE To record income tax expense at standarytale of 21% 77927 Totals 4,012 449 4012449 $ 240.000 HYDROQUAL, INC. Crew Trucks Cost Schedule 20X2 Initial investment, Dealer 1 Additions: Shop crew labor Materials Planning and supervision Shop rent allocation Shop utilities allocation Crew Truck Cost 7,040 16.275 1.120 1,553 662 $ 266.650