Presented below is the unaudited balance sheet of Watson Manufacturing Corp. as of December 31, 2016, as prepared by the brand new bookkeeper of Watson Manufacturing Corporation.

Watson Manufacturing Company

Balance Sheet

For the year ended December 31,2016

ASSETS:

Cash	$225,000
Inventories	560,000
Accounts Receivable	336,100
Prepaid Insurance	40,000
Investments	67,300
Land	450,000
Building	1,750,000
Machinery and Equipment	1,631,000
Goodwill	370,000
Total Assets	$5,429,400

LIABILITIES AND EQUITY:

Accounts Payable	$133,800
Mortgage payable, due 6/30/2017	900,000
Notes Payable	500,000
Lawsuit Liability	80,000
Income Taxes Payable	89,200
Accumulated Depreciation	420,000
Total Liabilities	$2,123,000
Common stock, $50 par; 40,000 shares issued	2,231,000
Retained Earnings	1,075,400
Total Equity	$3,306,400
Total Liabilities and Equity	$5,429,400

Your firm has been engaged to perform an audit, during which the following data are found:

-Checks totaling $24,000 in payment of accounts payable were mailed on Dec 30, 2016, but were not recorded until 2017. Cash includes $110,000 restricted for building purposes. The company's Board of Directors made an appropriation of retained earnings for the same amount at its last meeting on Dec 15, 2016.

-In the past, the company has experienced immaterial amounts of uncollectible accounts. However, in the past year, the company has more aggressively pursued new customers. The auditor estimates, based on an aging of accounts receivable, that $20,000 of the accounts receivable will not be collected in future accounting periods.

-During 2016, Watson purchased 500 shares of common stock of a major corporation that supplies Watson with raw materials. Total cost of this stock was $61,300, and fair value on Dec 31, 2016 was $54,000. The decline in fair value is considered temporary. Watson does not regularly engage in the purchase and sale of marketable securities.

-Treasury stock was recorded at cost when Watson purchased 200 of its own shares for $30 per share in May 2016. This amount is included in investments.

-The mortgage payable requires $50,000 principle payments, plus interest, at the end of each month. Payments were made on Dec 31, 2016, Jan 31, 2017 and Feb 28, 2017. The balance of this mortgage was due on June 30, 2017. On Mar 1, 2017, prior to issuance of the audited financial statements, Watson completed negotiations and signed a non-cancellable agreement with the lender to refinance this mortgage. The new terms require $100,000 annual principle payments, plus interest, on Feb 28 of each year, beginning in 2018. The final payment is due Feb 28, 2025.

-The lawsuit liability will be paid in 2017.

-The company was authorized to issue 100,000 shares of $50 par value common stock.

-The goodwill was related to the purchase of an online shopping subsidiary in 2011. A review of the subsidiary's operations indicates that it is near bankruptcy, indicating that the goodwill is 100% impaired.

-A review of inventory, for which the company uses the FIFO cost flow assumptions, reveals that the market value (replacement cost) of the inventory as defined by GAAP is $530,000.

As you becoome aware of the additional information, you recognize that Watson Manufacturing Company has made some significant account errors and omissions and that the balance sheet is not in proper format. You realize that the $9,800 fee your firm is going to charge them is not as high as you first thought.

REQUIRED:

1. Prepare a corrected classified balance sheet in good form as of December 31, 2016. You may need to add new accounts to the balance sheet, as necessary.

2. You know that your supervisor will want a well-designed spreadsheet prepared for the audit file that explaines all of the changes that you have made. She is always telling you that she "is not a mind reader" and cannot guess where changed numbers come from. Prepare a well-designed audit schedule for the audit file. For every number on the final balance sheet, present a properly labeled computation showing the change in the number from the original to the revised number. T-accounts or whatever way to show the change in numbers is okay.