Please help me with the question!

Au Natural, Inc. is a start-up company organized on January 1, 2018 by Tom and Bella to manufacture consumer products, including body sprays, hand soaps and hand sanitizers, made from all-natural products to distribute to retailers for sale. The bookkeeper's records show that each of the shareholders received 10,000 shares of stock in return for their contribution of the following assets on January 1, 2018: Shareholder's initial Cost on 1/1/18 Fair market value on 1/1/18 Property Contributed Tom Cash $110,000 $110,000 Bella Cash $20,000 $20,000 Building* $120,000 $160,000 *The building contributed was attached to a $70,000 interest only 5-year balloon mortgage with an annual interest rate of 5% due December 31, 2023. Additional Details: As of January 1, 2020, the company had 20,000 shares of stock outstanding. The owners decided on a vertical integration strategy to help solidify access to raw materials needed for manufacture. The company purchased an 6% investment in Natural Emollients Company (NEC) in 2019 for $10,000 and the bookkeeper recorded the purchase of the investment. On June 1, 2020, the company paid $20,000 to buy an additional 12% of the common stock of NEC. NEC paid dividends to Au Natural, Inc. equal to $3,000 in 2020. The company issued a 5% common stock dividend to shareholders on June 1, 2020. The owners decided that the market value of the stock on the date of the stock dividend was $14. The company refinanced the entire mortgage payable and borrowed an additional $25,000 on January 1, 2020. The mortgage remains a balloon loan with a 5% annual interest rate due in 5 years. On September 1, 2020, the company repurchased 500 shares of stock (250 shares from each shareholder) at a cost of $8,000 because the shareholders decided that they needed more money to pay their personal taxes. The company paid dividends of $13,000 to the shareholders on December 1, 2020. In December 2017, the property manager discovered a toxic chemical spill on the land purchased on January 1, 2019. See details included below. The following is the company's trial balance for December 31, 2019 and adjusted trial balance for December 31, 2020 (*adjusted - but not yet corrected). Final Trial Balance Adjusted Trial Balance 31-Dec-19 31-Dec-20 DR DR Account CR CR $20,000 $47,000 $2,000 $50,000 $10,000 $3,000 $40,000 $50,000 $68,000 $44,000 $3,000 $55,000 $30,000 $2,000 $70,000 $65,000 $12,500 $27,750 $40,000 $20,000 $160,000 $160,000 cash accounts receivable dividends receivable Inventory Investment (NEC) other current assets land equipment accum depr - equipment automobile accum depr - automobile buildings accum depr - buildings accounts payable salaries payable interest payable income tax payable notes payable mortgage payable common stock paid in capital in excess of par retained earnings dividends treasury stock sales revenue dividend revenue cost of goods sold salaries expense depreciation expense interest expense charitable contribution officer's life insurance expense meals and entertainment loss on sale of equipment federal income tax expense Totals *adjusted - but not yet corrected $17,500 $20,000 $5,000 $2,000 $8,000 S- $70,000 $200,000 $20,000 $47,000 $26,250 $3,000 $2,000 $4,000 $7,000 $30,000 $95,000 $210,000 $24,000 $47,000 $27,000 $8,000 $260,000 $3,000 $75,000 $65,000 $34,000 $3,900 $3,000 $1,100 $5,000 $3,000 $17,000 $739,000 $422,000 $422,000 $739,000 Au Natural, Inc. Environmental Remediation To: Management From: Tom and Bella, Owners and Shareholders Date: December 30, 2020 MEMORANDUM Debbie, the property manager of Au Natural, Inc., reported to the company owner/shareholders this month that she was notified by the Environmental Protection Agency (EPA) that a toxic chemical spill on the company's land was discovered. The land in question was that which was purchased on January 1, 2020, from ABCD Company in an arm's length transaction for $30,000. Debbie hired an environmental engineer who discovered that there was an underground tank that had been leaking chemicals into the land for the last two years. The chemical leak finally became so bad the last couple of months that the chemical spill had contaminated the groundwater, at which time the EPA discovered the contamination. According to the environmental engineer's report, dated December 30, 2020, the following costs are expected to be incurred during the first quarter of 2021 to clean up and restore the land to its original condition. The estimated cost to clean up the oil spill is expected to be $45,000, including removal and disposal of contaminated property for $35,000, special cleaning agents of $3,000 and labor costs of $7,000. The Environmental Protection agency imposes an initial fine and penalty of $4,500 upon discovery of the oil spill. The EPA rules require that we remediate the property immediately or face an additional $100,000 fine. The engineer submitted a bill for $6,500 for their report delivered on December 15, 2020. The bill was received but not booked. At the time the land was purchased, the company hired Real Inspection and Title Co. to certify the land was in salable condition as of the date of the original purchase. In researching Real's insurance policy in effect at the date of purchase of the land, Debbie thought we could file a claim for up to $20,000 to recover some of the cost of the clean-up from Real's Insurance policy. Although when she called Real, the company's owner asserted that there is a clause in the contract stating that any underground contamination is excluded from any coverage. Debbie also did some research and determined that she can file an application for a grant to receive reimbursement for clean-up costs of up to $10,000 from the Brownfields Remediation and Economic Development Fund after paying for the clean-up costs. We intend to exercise all legal remedies to receive reimbursement of these costs. As such, we consulted an attomey to analyze the impact of the environmental remediation required. Further, a $7,000 bill from the attorney for the month ended December 31, 2020 relates to the above matter bill was received but not booked. Our options are to clean up the oil spill or abandon the land and pay a fine to the EPA for $100,000. We will file an application under the Brownfields Remediation and Economic Development Fund, file for any possible insurance claims and take any legal action necessary against the seller of the land and Real Inspection and Title Co. Management is concerned that if they do not clean up the oil spill, the company may not be able to continue operations. You have been hired to prepare a compilation of a complete set of financial statements for 2020. Assume that the books have not yet been closed for 2020. You review the financial records and find the following issues: 1 Decide how to account for the chemical spill. What entry do you propose for the chemical spill and why? Explain your logic and support your answer with citations from ASC. 2 You determine that the company should have recorded uncollectible accounts expense equal to 2% of accounts receivable for 2019 and 2020. 3 You review the fixed asset details and determine that the Building contributed on 1/1/18 should have been depreciated using the double declining balance with a 20-year useful life with a salvage value of $10,000. 4 You research the information related to the purchase of Natural Emollients Company and determine that the bookkeeper did not know how to record these transactions. According to your valuation experts, the fair value of Natural Emollients Company was $200,000 at the end of 2020 and $183,000 at the end of 2019. No dividends were paid from Natural Emollients Company to Au Natural, Inc. in 2019 but $3,000 of dividends were paid from Natural Emollients Company to Au Natural, Inc. in 2020 as booked. Natural Emollients Company recorded net income of $52,000 in 2020 and $80,000 in 2019. 5 You review the loan documents and discover that the Note Payable related to the purchase of the land was improperly marked as a 5-year, 4% note but should have been a 4%, 5-year note. Further, upon reviewing the mortgage you learn that the bookkeeper did not accrue interest on the newly refinanced mortgage since it is a balloon loan. 6 You discover that a contract with Bella's sister (a related party) was not recorded. The terms of the agreement were the sale of a pallet of hand sanitizer in 2020 for $3,000 cash paid directly from the sister to Bella. Bella deposited the money into her personal checking account. The fair value of such a sale is $6,500. 7 You review the articles of incorporation and purchase agreements and determine that the company was capitalized on January 1, 2018, with cash for common stock with a par value of $1. The bookkeeper's records were incorrect as she incorrectly recorded the stock issuance at a par value of $10. Consider: does this impact the stock dividend? 8 Prepare the journal entry to record the tax provision. 1. Prepare an adjusted and corrected trial balance in excel by posting any required journal entries into your 10-column worksheet. Post all of the above entries to the 10-column worksheet and make sure your debit columns equal your credit columns. 2. After computing pre-tax book income, prepare an income tax provision (#8 above) using the following: Review the trial balance for any book/tax differences. Note that the bookkeeper did not include deferred income taxes in the financial statements. The current income tax rate is 21%. You remember that estimated costs and penalties are not deductible for tax purposes. MACRS with a half year convention is required for tax purposes. MACRS charts are included in the appendix attached here. Tax law does not allow mark to market accounting and does not allow for the equity method unless a company owns greater than 80% of another company. Dividends are included in taxable income when received. You determine that a 50% valuation allowance is needed due specifically to the pending environmental remediation issue. 3. Prepare financial statements. You must have a final trial balance to prepare the financial statements. Prepare all required financial statements for Au Natural, Inc. using all previous information Prepare IN GOOD FORM the following financial statements: Balance Sheet, Income Statement with earnings per share, Statement of Retained Earnings, Statement of Cash Flows. Appendix A -- Tax Depreciation Records: TAX Depreciation Tax Purchase Date Depreciation Method 2/1/20 7 yr MACRS 2018 deprec Cost 2019 deprec 2020 deprec Equipment 15,000 Equipment 1/1/197yr MACRS 50,000 7,145 Building 1/1/18 39 yr SL 160,000 3,932 4,103 Auto 1/1/18 5yr MACRS 40,000 sold 8,000 12,800 Land 1/1/19 40,000 Land 1/1/20 30,000 11,932 24,048 MACRS applicable percentage for property class Recovery 3-Year 5-Year 7-Year 10-Year 15-Year 20-Year Year 1 33.33 20.00 14.29 10.00 5.00 3.750 2 44.45 32.00 24.49 18.00 9.50 7.219 3 14.81.19.20 17.49 14.40 8.55 6.677 4 7.41 11.52* 12.49 11.52 7.70 6.177 5 11.52 8.93 9.22 6.93 5.713 6 5.76 8.92 7.37 6.23 5.285 7 8.93 6.55 5.90* 4.888 6 8 4.46 6.55 5.90 4.522 9 6.56 5.91 4.462 * Au Natural, Inc. is a start-up company organized on January 1, 2018 by Tom and Bella to manufacture consumer products, including body sprays, hand soaps and hand sanitizers, made from all-natural products to distribute to retailers for sale. The bookkeeper's records show that each of the shareholders received 10,000 shares of stock in return for their contribution of the following assets on January 1, 2018: Shareholder's initial Cost on 1/1/18 Fair market value on 1/1/18 Property Contributed Tom Cash $110,000 $110,000 Bella Cash $20,000 $20,000 Building* $120,000 $160,000 *The building contributed was attached to a $70,000 interest only 5-year balloon mortgage with an annual interest rate of 5% due December 31, 2023. Additional Details: As of January 1, 2020, the company had 20,000 shares of stock outstanding. The owners decided on a vertical integration strategy to help solidify access to raw materials needed for manufacture. The company purchased an 6% investment in Natural Emollients Company (NEC) in 2019 for $10,000 and the bookkeeper recorded the purchase of the investment. On June 1, 2020, the company paid $20,000 to buy an additional 12% of the common stock of NEC. NEC paid dividends to Au Natural, Inc. equal to $3,000 in 2020. The company issued a 5% common stock dividend to shareholders on June 1, 2020. The owners decided that the market value of the stock on the date of the stock dividend was $14. The company refinanced the entire mortgage payable and borrowed an additional $25,000 on January 1, 2020. The mortgage remains a balloon loan with a 5% annual interest rate due in 5 years. On September 1, 2020, the company repurchased 500 shares of stock (250 shares from each shareholder) at a cost of $8,000 because the shareholders decided that they needed more money to pay their personal taxes. The company paid dividends of $13,000 to the shareholders on December 1, 2020. In December 2017, the property manager discovered a toxic chemical spill on the land purchased on January 1, 2019. See details included below. The following is the company's trial balance for December 31, 2019 and adjusted trial balance for December 31, 2020 (*adjusted - but not yet corrected). Final Trial Balance Adjusted Trial Balance 31-Dec-19 31-Dec-20 DR DR Account CR CR $20,000 $47,000 $2,000 $50,000 $10,000 $3,000 $40,000 $50,000 $68,000 $44,000 $3,000 $55,000 $30,000 $2,000 $70,000 $65,000 $12,500 $27,750 $40,000 $20,000 $160,000 $160,000 cash accounts receivable dividends receivable Inventory Investment (NEC) other current assets land equipment accum depr - equipment automobile accum depr - automobile buildings accum depr - buildings accounts payable salaries payable interest payable income tax payable notes payable mortgage payable common stock paid in capital in excess of par retained earnings dividends treasury stock sales revenue dividend revenue cost of goods sold salaries expense depreciation expense interest expense charitable contribution officer's life insurance expense meals and entertainment loss on sale of equipment federal income tax expense Totals *adjusted - but not yet corrected $17,500 $20,000 $5,000 $2,000 $8,000 S- $70,000 $200,000 $20,000 $47,000 $26,250 $3,000 $2,000 $4,000 $7,000 $30,000 $95,000 $210,000 $24,000 $47,000 $27,000 $8,000 $260,000 $3,000 $75,000 $65,000 $34,000 $3,900 $3,000 $1,100 $5,000 $3,000 $17,000 $739,000 $422,000 $422,000 $739,000 Au Natural, Inc. Environmental Remediation To: Management From: Tom and Bella, Owners and Shareholders Date: December 30, 2020 MEMORANDUM Debbie, the property manager of Au Natural, Inc., reported to the company owner/shareholders this month that she was notified by the Environmental Protection Agency (EPA) that a toxic chemical spill on the company's land was discovered. The land in question was that which was purchased on January 1, 2020, from ABCD Company in an arm's length transaction for $30,000. Debbie hired an environmental engineer who discovered that there was an underground tank that had been leaking chemicals into the land for the last two years. The chemical leak finally became so bad the last couple of months that the chemical spill had contaminated the groundwater, at which time the EPA discovered the contamination. According to the environmental engineer's report, dated December 30, 2020, the following costs are expected to be incurred during the first quarter of 2021 to clean up and restore the land to its original condition. The estimated cost to clean up the oil spill is expected to be $45,000, including removal and disposal of contaminated property for $35,000, special cleaning agents of $3,000 and labor costs of $7,000. The Environmental Protection agency imposes an initial fine and penalty of $4,500 upon discovery of the oil spill. The EPA rules require that we remediate the property immediately or face an additional $100,000 fine. The engineer submitted a bill for $6,500 for their report delivered on December 15, 2020. The bill was received but not booked. At the time the land was purchased, the company hired Real Inspection and Title Co. to certify the land was in salable condition as of the date of the original purchase. In researching Real's insurance policy in effect at the date of purchase of the land, Debbie thought we could file a claim for up to $20,000 to recover some of the cost of the clean-up from Real's Insurance policy. Although when she called Real, the company's owner asserted that there is a clause in the contract stating that any underground contamination is excluded from any coverage. Debbie also did some research and determined that she can file an application for a grant to receive reimbursement for clean-up costs of up to $10,000 from the Brownfields Remediation and Economic Development Fund after paying for the clean-up costs. We intend to exercise all legal remedies to receive reimbursement of these costs. As such, we consulted an attomey to analyze the impact of the environmental remediation required. Further, a $7,000 bill from the attorney for the month ended December 31, 2020 relates to the above matter bill was received but not booked. Our options are to clean up the oil spill or abandon the land and pay a fine to the EPA for $100,000. We will file an application under the Brownfields Remediation and Economic Development Fund, file for any possible insurance claims and take any legal action necessary against the seller of the land and Real Inspection and Title Co. Management is concerned that if they do not clean up the oil spill, the company may not be able to continue operations. You have been hired to prepare a compilation of a complete set of financial statements for 2020. Assume that the books have not yet been closed for 2020. You review the financial records and find the following issues: 1 Decide how to account for the chemical spill. What entry do you propose for the chemical spill and why? Explain your logic and support your answer with citations from ASC. 2 You determine that the company should have recorded uncollectible accounts expense equal to 2% of accounts receivable for 2019 and 2020. 3 You review the fixed asset details and determine that the Building contributed on 1/1/18 should have been depreciated using the double declining balance with a 20-year useful life with a salvage value of $10,000. 4 You research the information related to the purchase of Natural Emollients Company and determine that the bookkeeper did not know how to record these transactions. According to your valuation experts, the fair value of Natural Emollients Company was $200,000 at the end of 2020 and $183,000 at the end of 2019. No dividends were paid from Natural Emollients Company to Au Natural, Inc. in 2019 but $3,000 of dividends were paid from Natural Emollients Company to Au Natural, Inc. in 2020 as booked. Natural Emollients Company recorded net income of $52,000 in 2020 and $80,000 in 2019. 5 You review the loan documents and discover that the Note Payable related to the purchase of the land was improperly marked as a 5-year, 4% note but should have been a 4%, 5-year note. Further, upon reviewing the mortgage you learn that the bookkeeper did not accrue interest on the newly refinanced mortgage since it is a balloon loan. 6 You discover that a contract with Bella's sister (a related party) was not recorded. The terms of the agreement were the sale of a pallet of hand sanitizer in 2020 for $3,000 cash paid directly from the sister to Bella. Bella deposited the money into her personal checking account. The fair value of such a sale is $6,500. 7 You review the articles of incorporation and purchase agreements and determine that the company was capitalized on January 1, 2018, with cash for common stock with a par value of $1. The bookkeeper's records were incorrect as she incorrectly recorded the stock issuance at a par value of $10. Consider: does this impact the stock dividend? 8 Prepare the journal entry to record the tax provision. 1. Prepare an adjusted and corrected trial balance in excel by posting any required journal entries into your 10-column worksheet. Post all of the above entries to the 10-column worksheet and make sure your debit columns equal your credit columns. 2. After computing pre-tax book income, prepare an income tax provision (#8 above) using the following: Review the trial balance for any book/tax differences. Note that the bookkeeper did not include deferred income taxes in the financial statements. The current income tax rate is 21%. You remember that estimated costs and penalties are not deductible for tax purposes. MACRS with a half year convention is required for tax purposes. MACRS charts are included in the appendix attached here. Tax law does not allow mark to market accounting and does not allow for the equity method unless a company owns greater than 80% of another company. Dividends are included in taxable income when received. You determine that a 50% valuation allowance is needed due specifically to the pending environmental remediation issue. 3. Prepare financial statements. You must have a final trial balance to prepare the financial statements. Prepare all required financial statements for Au Natural, Inc. using all previous information Prepare IN GOOD FORM the following financial statements: Balance Sheet, Income Statement with earnings per share, Statement of Retained Earnings, Statement of Cash Flows. Appendix A -- Tax Depreciation Records: TAX Depreciation Tax Purchase Date Depreciation Method 2/1/20 7 yr MACRS 2018 deprec Cost 2019 deprec 2020 deprec Equipment 15,000 Equipment 1/1/197yr MACRS 50,000 7,145 Building 1/1/18 39 yr SL 160,000 3,932 4,103 Auto 1/1/18 5yr MACRS 40,000 sold 8,000 12,800 Land 1/1/19 40,000 Land 1/1/20 30,000 11,932 24,048 MACRS applicable percentage for property class Recovery 3-Year 5-Year 7-Year 10-Year 15-Year 20-Year Year 1 33.33 20.00 14.29 10.00 5.00 3.750 2 44.45 32.00 24.49 18.00 9.50 7.219 3 14.81.19.20 17.49 14.40 8.55 6.677 4 7.41 11.52* 12.49 11.52 7.70 6.177 5 11.52 8.93 9.22 6.93 5.713 6 5.76 8.92 7.37 6.23 5.285 7 8.93 6.55 5.90* 4.888 6 8 4.46 6.55 5.90 4.522 9 6.56 5.91 4.462 *