Problem 24-01 Your firm has been engaged to examine the financial statements of Skysong Corporation for the year 2020. The bookkeeper who maintains the financial records has prepared all the unaudited financial statements for the corporation since its organization on January 2, 2015. The client provides you with the information. Skysong Corporation Balance Sheet December 31, 2020 Assets Liabilities Current assets $1,868,000 Current liabilities Other assets 5,251,500 Long-term liabilities Stockholders' equity $7,119,500 $949,000 1,442,000 4,728,500 $7,119,500 An analysis of current assets discloses the following. Cash (restricted in the amount of $304,000 for plant expansion) Investments in land Accounts receivable less allowance of $30,000 Inventories (LIFO flow assumption) $564,000 187,000 474,000 643,000 $1,868,000 Other assets include: Prepaid expenses Plant and equipment less accumulated depreciation of $1,404,000 Cash surrender value of life insurance policy Unamortized bond discount Notes receivable (short-term) Goodwill Land $64,000 4,202,000 82,000 40,500 160,000 254,000 449,000 Land 449,000 $5,251,500 Current liabilities include: Accounts payable Notes payable (due 2023) Estimated income taxes payable Premium on common stock $501.000 154,000 143,000 151,000 $949,000 Long-term liabilities include: Unearned revenue Dividends payable (cash) 8% bonds payable (due May 1, 2025) $496,000 196,000 750,000 $1,442,000 Stockholders' equity includes: Retained earnings Common stock, par value $10; authorized 200,000 shares, 180,000 shares issued $2,928,500 1,800,000 $4,728,500 The supplementary information below is also provided. 2. On May 1, 2020, the corporation issued at 94.60, $750,000 of bonds to finance plant expansion. The long-term bond agreement provided for the annual payment of interest every May 1. The existing plant was pledged as security for the loan. Use the straight-line method for discount amortization. The bookkeeper made the following mistakes. a. In 2018, the ending inventory was overstated by $182,000. The ending inventories for 2019 and 2020 were correctly computed. 3. b. In 2020, accrued wages in the amount of $225,000 were omitted from the balance sheet, and these expenses were not charged on the income statement. c. In 2020, a gain of $173,000 (net of tax) on the sale of certain plant assets was credited directly to retained earnings. A major competitor has introduced a line of products that will compete directly with Skysong's primary line, now being produced in a specially designed new plant. Because of manufacturing innovations, the competitor's line will be of comparable quality but priced 50% below Skysong's line. The competitor announced its new line on January 14, 2021. Skysong indicates that the company will meet the lower prices that are high enough to cover variable manufacturing and selling expenses, but permit recovery of only a portion of fixed costs. You learned on January 28, 2021, prior to completion of the audit, of heavy damage because of a recent fire to one of Skysong's two plants; the loss will not be reimbursed by insurance. The newspapers described the event in detail. 4. Analyze the above information to prepare a corrected balance sheet for Skysong in accordance with proper accounting and reporting principles. Prepare a description of any notes that might need to be prepared. The books are closed and adjustments to income are to be made through retained earnings. (List Current Assets in order of liquidity.) SKYSONG CORPORATION Balance Sheet Assets $ Liabilities and Stockholders' Equity Liabilities and Stockholders' Equity $
