REQUIRED: The journal entries and financial statements prepared by Jerry Loos are attached. Review these data and prepare a list of additional information needed from Jerry. Develop and list 7-10 in-depth questions and/or requests for additional information that you would ask the CFO to provide to clarify the financial statement data that you read over.

HYDROQUAL, INC. Preliminary Financials 203 During the first week of January 204, Tom Fasbee called you to his office and asked if you would be willing to review HydroQual's financial statements one more time. The company had decided to offer a benefits package (medical insurance and pension) to try to keep its good employees. You remember there was some discussion of these matters during last year's engagement. Additionally, the company was finding it necessary to replace pumps, valves, and other equipment when performing maintenance. Initially, HydroQual simply arranged for the customer to purchase repair parts, and HydroQual then would install them. However, in late August, Rick and Kay decided that the company should carry its own equipment inventory. They both felt confident that their market would eventually extend beyond their current maintenance customers so they went ahead with the purchase of computerized pressure-monitoring pumps and valves inventory. Since these instruments are not bulky, they can be stored in the current shop space. They felt this line of parts would best meet their customer needs in terms of price and quality. In addition, they are offering to make good on any problems encountered by their customers on these items. Although not a large client, you liked the people at HydroQual and readily agreed to the assignment. Tom handed you the draft 203 financial statements that Jerry Loos had prepared and sent over. Jerry was expecting some questions from you tomorrow morning (Thursday), and indicated that he would have his responses ready for you the next day. You decided to consult with Martha Mason about the tax consequences of the pension plan. Martha was fairly certain that the plan and its funding were approved by ERISA. Thus, its benefits were insured and any expense computed was fully deductible for tax purposes. She also told you that you should be aware that any cash contributions in excess of the pension expense for the current year are not deductible according to the Internal Revenue Code Sec. 404(a)(1)(A)(ii). Additionally, Martha recalled that management planned to allocate prior service costs over the next 10 years beginning in 203. In addition, during your preliminary analytical review of HydroQual's general journal, you noticed two new investments in marketable equity and debt securities. You asked Martha whether an unrealized gain was taxable. She assured you that such gains would not be taxable until the securities were sold. REQUIRED: The journal entries and financial statements prepared by Jerry Loos are attached. Review these data and prepare a list of additional information needed from Jerry. Be as specific as possible and phrase your requests in the form of questions as they normally would be asked of a client. You should also be prepared to explain your reasons for asking specific questions. As you determine the data needed, be aware that once again, Jerry has asked you to prepare the statement of cash flows, statement of changes in stockholders' equity, financial statement notes, and earnings per share disclosures. He also reminded you that the bank wants comparative statements and requires the fair value of all financial instruments and information on major customers be disclosed. N anemersari a a ta. ar HYDROQUAL, INC. STATEMENT OF INCOME FOR THE YEAR ENDING DECEMBER 31, 20X3 Service revenue Sales revenue Total revenue \( \begin{array}{r}\multicolumn{2}{c}{20 \times 3} \\ \hline \$ 1,982,800 \\ 193,010 \\ \hline 2,175,810 \\ \hline\end{array} \) Cost of services sold 897,007132,1471,029,154 Gross profit 1,146,656 Operating expenses Selling and administrative 674,76054,024728,783 Other income (expense) Dividend income Interest revenue (expense) Total other income (expense) (3,636)(7,236) Operating income before income taxes 414,237 Income tax expense (86,990) Net income HYDROQUAL, INC. GENERAL JOURNAL (continued) vingrantint akir HYDROQUAL, INC. Preliminary Financials 203 During the first week of January 204, Tom Fasbee called you to his office and asked if you would be willing to review HydroQual's financial statements one more time. The company had decided to offer a benefits package (medical insurance and pension) to try to keep its good employees. You remember there was some discussion of these matters during last year's engagement. Additionally, the company was finding it necessary to replace pumps, valves, and other equipment when performing maintenance. Initially, HydroQual simply arranged for the customer to purchase repair parts, and HydroQual then would install them. However, in late August, Rick and Kay decided that the company should carry its own equipment inventory. They both felt confident that their market would eventually extend beyond their current maintenance customers so they went ahead with the purchase of computerized pressure-monitoring pumps and valves inventory. Since these instruments are not bulky, they can be stored in the current shop space. They felt this line of parts would best meet their customer needs in terms of price and quality. In addition, they are offering to make good on any problems encountered by their customers on these items. Although not a large client, you liked the people at HydroQual and readily agreed to the assignment. Tom handed you the draft 203 financial statements that Jerry Loos had prepared and sent over. Jerry was expecting some questions from you tomorrow morning (Thursday), and indicated that he would have his responses ready for you the next day. You decided to consult with Martha Mason about the tax consequences of the pension plan. Martha was fairly certain that the plan and its funding were approved by ERISA. Thus, its benefits were insured and any expense computed was fully deductible for tax purposes. She also told you that you should be aware that any cash contributions in excess of the pension expense for the current year are not deductible according to the Internal Revenue Code Sec. 404(a)(1)(A)(ii). Additionally, Martha recalled that management planned to allocate prior service costs over the next 10 years beginning in 203. In addition, during your preliminary analytical review of HydroQual's general journal, you noticed two new investments in marketable equity and debt securities. You asked Martha whether an unrealized gain was taxable. She assured you that such gains would not be taxable until the securities were sold. REQUIRED: The journal entries and financial statements prepared by Jerry Loos are attached. Review these data and prepare a list of additional information needed from Jerry. Be as specific as possible and phrase your requests in the form of questions as they normally would be asked of a client. You should also be prepared to explain your reasons for asking specific questions. As you determine the data needed, be aware that once again, Jerry has asked you to prepare the statement of cash flows, statement of changes in stockholders' equity, financial statement notes, and earnings per share disclosures. He also reminded you that the bank wants comparative statements and requires the fair value of all financial instruments and information on major customers be disclosed. N anemersari a a ta. ar HYDROQUAL, INC. STATEMENT OF INCOME FOR THE YEAR ENDING DECEMBER 31, 20X3 Service revenue Sales revenue Total revenue \( \begin{array}{r}\multicolumn{2}{c}{20 \times 3} \\ \hline \$ 1,982,800 \\ 193,010 \\ \hline 2,175,810 \\ \hline\end{array} \) Cost of services sold 897,007132,1471,029,154 Gross profit 1,146,656 Operating expenses Selling and administrative 674,76054,024728,783 Other income (expense) Dividend income Interest revenue (expense) Total other income (expense) (3,636)(7,236) Operating income before income taxes 414,237 Income tax expense (86,990) Net income HYDROQUAL, INC. GENERAL JOURNAL (continued) vingrantint akir