Prepare a corrected retained earnings.

Year 2 Check figures:

Cash Flows: Net cash from operations $331,785 Net cash from financing $240,000

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 202 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 31,202 have been booked. HYDROQUAL, INC. BALANCE SHEET DECEMBER 31, 20X2 ASSETS CURRENT ASSETS Cash Accounts receivable Supplies on hand \( \begin{array}{r}\multicolumn{2}{c}{20 \times 2} \\ \hline \$ \quad 314,910 \\ 153,500 \\ 6,860 \\ 2,654 \\ \hline 477,924 \\ \hline\end{array} \) 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 39,000310,522 TOTAL ASSETS $788,447 LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES CURRENT LIABILITIES Accounts payable Wages payable Taxes payable Total Current Liabilities 14,30310,86077,927103,089 LONG TERM LIABILITIES Long-term lease payable Note payable Total Long Term Liabilities 6,985240,000246,985 Total Liabilities 350,074 STOCKHOLDERS" EQUITY Common stock Retained earnings Total Stockholders" Equity TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $788,447 HYDROQUAL, INC. STATEMENT OF INCOME FOR THE YEAR ENDING DECEMBER 31, 20X2 HYDROQUAL, INC. JOURNAL ENTRIES DECEMBER 31, 20X2 HYDROQUAL, INC. IAIDNIAI ENTDIEE 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 202 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 31,202 have been booked. HYDROQUAL, INC. BALANCE SHEET DECEMBER 31, 20X2 ASSETS CURRENT ASSETS Cash Accounts receivable Supplies on hand \( \begin{array}{r}\multicolumn{2}{c}{20 \times 2} \\ \hline \$ \quad 314,910 \\ 153,500 \\ 6,860 \\ 2,654 \\ \hline 477,924 \\ \hline\end{array} \) 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 39,000310,522 TOTAL ASSETS $788,447 LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES CURRENT LIABILITIES Accounts payable Wages payable Taxes payable Total Current Liabilities 14,30310,86077,927103,089 LONG TERM LIABILITIES Long-term lease payable Note payable Total Long Term Liabilities 6,985240,000246,985 Total Liabilities 350,074 STOCKHOLDERS" EQUITY Common stock Retained earnings Total Stockholders" Equity TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $788,447 HYDROQUAL, INC. STATEMENT OF INCOME FOR THE YEAR ENDING DECEMBER 31, 20X2 HYDROQUAL, INC. JOURNAL ENTRIES DECEMBER 31, 20X2 HYDROQUAL, INC. IAIDNIAI ENTDIEE