Presented below is the adjusted trial balance of Bailey Corporation at December 31, 2013. Debits Credits Cash $52,000 Accounts Receivable 173,000 Allowance for Doubtful Accounts 10,400 Prepaid Insurance 6,300 Inventory 319,300 Long-term Investments 345,000 Land 105,000 Construction Work in Progress 136,000 Patents 36,000 Equipment 380,000 Accumulated Depreciation - Equipment 165,000 Unamortized Discount on Bonds Payable 20,000 Accounts Payable 152,200 Accrued Expenses 52,000 Notes Payable 100,000 Bonds Payable 400,000 Common Stock 500,000 Premium on Common Stock 50,000 Retained Earnings 143,000 Total $1,572,600 $1,572,600 Additional Information: 1. The LIFO method of inventory value is used. 2. The cost and fair value of the long-term investments that consist of stocks and bonds is the same. 3. The amount of the Construction Work in Progress account represents the costs expended to date on a building in the process of construction. (The company rents factory space at the present time.) The land on which the building is being constructed cost $105,000, as shown in the trial balance. 4. The patents were purchased by the company at a cost of $40,000 and are being amortized on a straight-line basis. 5. Of the unamortized discount on bonds payable, $2,000 will be amortized in 2011. 6. The notes payable represent bank loans that are secured by long-term investments carried at $120,000. These bank loans are due in 2014. 7. The bonds payable bear interest at 8% payable every December 31, and are due January 1, 2023. 8. 600,000 shares of common stock of a par value of $1 were authorized, of which 500,000 shares were issued and outstanding. Instructions: Prepare a classified balance sheet as of December 31, 2013, so that all important information is fully disclosed. (Expand rows as necessary) BAILEY CORPORATION Balance Sheet December 31, 2013 Assets Current assets Account Title Amount Account Title Amount Account Title Amount Formula Account Title Amount Account Title Amount Total current assets Formula Long-term investments Account Title Amount Property, plant and equipment Account Title Amount Account Title Amount Account Title Amount Formula Account Title Amount Total property, plant and equipment Formula Intangible assets Account Title Amount Total assets Formula Liabilities and Stockholders Equity Current liabilities Account Title Amount Account Title Amount Account Title Amount Total current liabilities Formula Long-term liabilities Account Title Amount Account Title Amount Total long-term liabilities Formula Total liabilities Formula Stockholders equity Account Title Amount Account Title Amount Formula Account Title Amount Total stockholders equity Formula Total liabilities and stockholders equity Formula ======================================================= Instructions: For each of the items below, discuss any additional disclosures in the financial statements and notes that the auditor should recommend to her client. (The cumulative effect of the four items should not be considered.) Note: All discussions must include proper citations. If citations are not included, no points will be earned. Item 1 A 10-year loan agreement, which the company entered into 3-year ago, provides that dividend payments may not exceed net income earned after taxes subsequent to the date of the agreement. The balance of retained earnings at the date of the loan agreement was $520,000. From that date through December 31, 2013, net income after taxes has totaled $670,000 and cash dividends have total $420,000. On the basis of these date, the staff auditor assigned to this review concluded that there was no retained earnings restricted at December 31, 2013. Answer: Item 2 Recently Sun interrupted its policy of paying cash dividends quarterly to its stockholders. Dividends were paid regularly through 2012, discontinued for all of 2013 to finance purchase of equipment for the company's new plant, and resumed in the first quarter of 2014. In the annual report dividend policy is to be discussed in the president's letter to stockholders. Answer: Item 3 A major electronics firm has introduced a line of products that will compete directly with Sun's primary line, not being produced in the specially designed new plant. Because of manufacturing innovations, the competitor's line will be of comparable quality but priced 50% below Sun's line. The competitor announced its new line during the week following completion of field work. Ms. Stokes read the announcement in the newspaper and discussed the situation by telephone with Sun executives. Sun will meet the lower prices that are high enough to cover variable manufacturing and selling expenses but will permit recovery of only a portion of fixed costs. Answer: Item 4 The company has adopted a policy of recording self-insurance for any possible losses resulting from injury to others by the company's delivery trucks. The premium for an insurance policy for the same risk from an independent insurance company would have an annual cost of $50,000. During the period covered by the financial statements, there were no accidents involving the company's trucks that resulted in injury to others