Question
REQUIREMENT 7 It was a pretty autumn day in late October 20X4. Tom Fasbee had just returned from vacation.He was getting caught up on the
REQUIREMENT 7
It was a pretty autumn day in late October 20X4. Tom Fasbee had just returned from vacation.He was getting caught up on the many matters that no one else had handled while he was gone. Near the middle of a stack of messages, he found a note from Nick Riley. Nick requested an appointment with Tom and you. Tom arranged a meeting with Nick, Ray, Jerry, and you for 2:00 P.M. the next day at Aguamaint.
Once the meeting began, Nick reminded Tom of a pickleball engagement and then got down to business. First, Nick noted that maintenance work and merchandise sales were going like "gangbusters." To meet demand, Aguamaint now was running two crews at night and had also begun selling inventory parts separate from the maintenance work.
Tom asked what steps had been taken to expand their customer base.Ray replied that Aguamaint had acquired a 20 percent interest in the small dealership, PVCO, which carried their line of pumps and valves.Ray also had been appointed a member of PVCO's board.This new investment would give Aguamaint the opportunity to observe and learn the equipment supply business first hand. If things went well, Aguamaint would later consider acquiring the remaining interest in the dealership.
Ray indicated that Aguamaint had paid more than book value for the stock because PVCO owned an important patent that had been developed internally that was not included in their financial statements. The patent has a remaining life of 4 years. You also learned later from Linda Durkee that the equity method of accounting was not allowed for tax purposes. For tax purposes, such investments were recorded at cost, and the only income reported came from dividends.Linda Durkee also revealed that when equity ownership equals 20 percent or more, the dividends received deduction is 65 percent rather than 50 percent.
Nick then stated that because they had the expertise in-house, the Company had decided to take on the construction of a water treatment plant for a small town nearby. As it happened, a warehouse had come up for sale just a block away from the shop, and although it was larger than what they needed to house the inventory items, the extra space was perfect for setting up the facility needed to support construction projects. The warehouse was purchased on March 15, 20X4. All equipment needed to move and store the inventory and to perform the work related to the construction of the water treatment plant was purchased and put into use on the same date.
The financing for these investments was provided in part by a local investor who had been Nick's college roommate and was a trusted friend. He has been so impressed by the growth and potential of Aguamaint, that he was eager to negotiate a convertible bond, with the idea of becoming an owner in the future if the company continued on its current path. The bond was set up with the same covenants that the Bank had required on the note, and also required that the annual financial statements would be audited instead of reviewed as in the first three years. The bond was set up to convert to 3,400 shares of common stock any time after two years of the five year term.
Jerry hoped that Lake & Lock would accept the engagement and that you would conduct the audit.Although the thought of one more time crossed your mind, the engagement was accepted.In parting, you asked Jerry to furnish 20X4 financial statements in early January.Because of the large increase in the pump and valve inventory levels, you also requested that
Lake & Lock be involved with the year-end physical inventory. This prompted Jerry to ask whether expanding the line of merchandise and doing construction would put Aguamaint in two or three lines of business and whether this would impact the financial statements.
You observed the physical inventory in late December and found that the construction job was well underway. On January 16, 20X5, Jerry sent you copies of the financial statements and related schedules, and a pre-audit meeting was scheduled for January 19.
REQUIRED:
The journal entries and financial statements prepared by Jerry Loos are attached.Review these data and 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. 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 once the audit is complete. 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.
AGUAMAINT, INC.
BALANCE SHEET
DECEMBER 31, 20X4
Current asset
cash 320423
Account receivable 392100
Allowance for doubtful accounts (36000)
Inventory 333748
supplies on hand 14845
Prepaid Insurance 427
Total current asset 1025543
Property , Plant, and Equipement
Land 134000
Equipement 190700
Accumulated depreciation equipement (49067)
Vehicles
258,000
Accumulated depreciation--vehicles
(126,400)
Warehouse
410,000
Accumulated depreciation--warehouse
(10,250)
Total Property, Plant, and Equipment
RIGHT OF USE ASSETS
806,983
Operating lease-building
235,379
Finance lease-trucks
73,442
Total Right of Use Assets
INTANGIBLE ASSETS
308,821
License agreement
35,200
Total Intangible Assets
OTHER ASSETS
35,200
Marketable equity investment
216,885
AFS bond investment
100,556
Long-term investment
415,000
Deferred income tax
56,186
20X4
Total Other Assets788,627
TOTAL ASSETS$2,965,174
STOCKHOLDERS' EQUITY
Common stock
150,000
Retained earnings
1,458,725
AGUAMAINT, INC.
STATEMENT OF INCOME
FOR THE YEAR ENDING DECEMBER 31, 20X4
Service contract revenue
$3,041,000
Sales revenue
1,242,000
Construction revenue (Note 14)
167,000
Total revenue
4,450,000
Cost of services sold
1,251,944
Cost of goods sold
864,810
Construction cost of goods sold (Note 14)
176,221
20X4
Cost of goods sold2,292,975
Gross profit2,157,025
Other income (expense)
Investment income (loss)
14,340
Interest expense
(25,475)
Total other income (expense)
(11,135)
Operating income before income taxes
1,065,601
Income tax expense
(223,776)
Net income
$841,825
Service contract revenue
$3,041,000
Sales revenue
1,242,000
Construction revenue (Note 14)
167,000
Total revenue
4,450,000
Cost of services sold
1,251,944
Cost of goods sold
864,810
Construction cost of goods sold (Note 14)
176,221
20X4
Cost of goods sold2,292,975
Gross profit2,157,025
Operating expenses
Selling and administrative
968,386
Depreciation and amortization
111,902
Total operating expenses1,080,289
Operating income1,076,736
Accumulated other comprehensive income
(145,176)
Total Stockholders' Equity
1,463,549
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$2,965,174
AGUAMAINT, INC.
JOURNAL ENTRIES
DECEMBER 31, 20X4
1
1/1/X4
410
LEASE PAYABLE-BUILDING
39,000
101
CASH
39,000
To record operating lease payment on shop and office building.
2
2/1/X4
412
LEASE PAYABLE-TRUCKS
26,198
101
CASH
26,198
To record finance lease payment on truck.
3
2/1/X4
311
INTEREST PAYABLE-NOTES
9,627
401
LONG-TERM DEBT-NOTES
50,400
101
CASH
60,027
To record annual payment on note.
4
2/1/X4
132
PREPAID INSURANCE
160
610
SELLING & ADMIN-INSURANCE
4,960
101
CASH
5,120
To purchase annual insurance policy.
5
523
COST OF GOODS SOLD-WAREHOUSE RENT
7,500
101
CASH
7,500
To record payment of rent on warehouse.
6
3/15/X4
151
LAND
134,000
161
BUILDINGS
410,000
171
EQUIPMENT
148,000
101
CASH
692,000
To record purchase of warehouse, forklifts, conveyor belts, and construction equipment.
7
6/1/X4
202
EQUITY SECURITIES-EQUITY METHOD INTEREST
415,000
101
CASH
415,000
To record purchase of investment in affiliate PVCO.
8
6/30/X4
101
CASH
1,500
750
INTEREST REVENUE-AFS DEBT SEC
1,500
To record receipt of semi-annual interest on AFS bond investment.
9
7/1/X4
101
CASH
535,163
754
DEBT ISSUE EXPENSE
1,750
404
DISCOUNT AND DEBT ISSUE COSTS ON BOND PAYABLE
7,087
403
LONG-TERM DEBT-BONDS
544,000
To record convertible bond issue.
10
108
ALLOWANCE FOR DOUBTFUL ACCOUNTS
46,000
105
ACCOUNTS RECEIVABLE
46,000
To write off uncollectible accounts.
11
101
CASH
355,000
105
ACCOUNTS RECEIVABLE
2,764,000
335
DEFERRED CONTRACT REVENUE
78,000
505
SERVICE REVENUE FROM CONTRACTS WITH CUSTOMERS
3,041,000
To record service revenue for 20X4.
12
121
MERCHANDISE INVENTORY
946,330
301
ACCTS PAY-INVENTORIABLE COSTS
946,330
To record purchase of inventory via air freight.
13
105
ACCOUNTS RECEIVABLE
1,242,000
501
SALES REVENUE
1,242,000
To record sales revenue for 20X4.
14
521
COST OF GOODS SOLD-INVENTORY
794,880
121
MERCHANDISE INVENTORY
794,880
To record cost of inventory sold.
15
101
CASH
1,146,900
105
ACCOUNTS RECEIVABLE
1,146,900
To record customer payments on account for merchandise sales.
16
101
CASH
2,624,000
105
ACCOUNTS RECEIVABLE
2,624,000
To record client payments on account for service contracts.
17
560
SERVICE COSTS-DIRECT-CREW WAGES
728,721
305
WAGES PAYABLE
15,140
305
WAGES PAYABLE
27,930
101
CASH
715,931
To record payment and accrual of wage expense.
18
561
SERVICE COSTS-INDIRECT-SHOP WAGES
308,700
305
WAGES PAYABLE
5,024
305
WAGES PAYABLE
8,870
101
CASH
304,854
To record payment and accrual of wage expense.
19
631
SELLING & ADMINISTRATIVE-OTHER
14,005
611
SELLING & ADMIN-OFFICERS SALARIES
202,800
612
SELLING & ADMIN-OTHER SALARIES
65,020
609
SELLING & ADMIN-PROFESSIONAL FEES
8,381
615
SELLING & ADMIN-PAYROLL AND OTHER TAXES
123,260
607
SELLING & ADMIN-SUPPLIES
12,980
101
CASH
426,445
To record payment of various selling and administrative expenses.
20
562
SERVICE COSTS-INDIRECT-SHOP UTILITIES
30,345
601
SELLING & ADMIN-UTILITIES
6,069
101
CASH
36,414
To record payment of utilities.
21
553
SERVICE COSTS-DIRECT-FUEL
82,050
101
CASH
82,050
To record fuel purchases.
22
129
SUPPLIES ON HAND
890
564
SERVICE COSTS-INDIRECT-SUPPLIES
54,869
302
ACCTS PAY-SUPPLIERS-OTHER COSTS
55,759
To record purchase of supplies and adjustment of year end balance.
23
302
ACCTS PAY-SUPPLIERS-OTHER COSTS
50,574
314
INCOME TAX PAYABLE
44,467
101
CASH
95,041
To record payment to suppliers and to IRS for taxes.
24
554
SERVICE COSTS-DIRECT-R AND M
14,760
101
CASH
14,760
To record payment of repairs and maintenance costs.
25
603
SELLING & ADMIN-MEDICAL BENEFITS
47,190
101
CASH
47,190
To record purchase of health insurance policy.
26
314
INCOME TAX PAYABLE
99,045
101
CASH
99,045
Record payment of estimated 20X4 taxes based on 90% of 20X3 current tax payable.
27
522
COST OF GOODS SOLD-AIR FREIGHT
62,430
101
CASH
62,430
To record payment of air freight bill.
28
613
SELLING & ADMIN-SALES SAL & COMM
37,260
101
CASH
37,260
To record payment of sales salaries and commissions.
29
614
SELLING & ADMIN- WAREHOUSE WAGES
241,540
101
CASH
241,540
To record payment of warehouse wages.
30
301
ACCTS PAY-INVENTORIABLE COSTS
828,230
101
CASH
828,230
To record payment to inventory supplier.
31
581
COST OF CONSTRUCTION
176,221
101
CASH
176,221
To record cost of water plant construction project to date.
32
101
CASH
167,000
511
CONSTRUCTION REVENUE FROM CONTRACTS WITH CUSTOMERS
167,000
To record receipt of monthly billings on water plant project.
33
422
WARRANTY LIABILITY
2,203
101
CASH
2,203
To record payment to repair and replace pump and valve inventory items.
34
101
CASH
3,700
805
INVESTMENT INCOME-INVEST IN AFFILIATE
3,700
To record receipt of affiliate PVCO dividends.
35
101
CASH
6,400
804
DIVIDEND INCOME-MKT EQ SEC-LT
6,400
To record receipt of dividends on AEP shares.
36
12/31/X4
101
CASH
1,500
750
INTEREST REVENUE-AFS DEBT SEC
1,500
To record receipt of semi-annual interest on AFS bond investment.
37
12/31/X4
701
TRUCK DEPRECIATION
43,867
182
VEHICLES-ACCUMULATED DEPRECIATION
43,867
To record annual depreciation expense on trucks.
38
12/31/X4
704
EQUIPMENT DEPRECIATION
6,100
172
EQUIPMENT-ACCUMULATED DEPRECIATION
6,100
To record annual depreciation expense on office equipment.
39
12/31/X4
710
AMORTIZATION OF LICENSING COSTS
3,200
197
LICENSE
3,200
To record annual amortization of licensing cost.
40
12/31/X4
708
AMORTIZATION OF RIGHT-OF-USE ASSETS
23,819
758
INTEREST EXPENSE-LEASE PAYABLE
3,270
193
RIGHT-OF-USE ASSET--LEASE-TRUCKS
23,819
312
INTEREST PAYABLE-FINANCE LEASE LIABILITY
3,270
To record amortization and interest expense on finance lease for truck.
41
12/31/X4
751
INTEREST EXPENSE-NOTE PAYABLE
6,855
311
INTEREST PAYABLE-NOTES
6,855
To accrue interest expense on note payable.
42
12/31/X4
616
SELLING & ADMIN-PENSION SERVICE COST
147,422
414
PENSION LIABILITY
37,422
101
CASH
110,000
To record annual pension expense and payment to pension trustee.
43
12/31/X4
401
LONG-TERM DEBT-NOTES
3,024
321
SHORT-TERM PORTION OF L-T NOTES
3,024
To reclassify needed amount to current portion per amortization schedule.
44
12/31/X4
205
DEBT SECURITIES-AFS MARKETABLE
1,856
473
ACCUM OCI-MARKET GAIN/LOSS-AFS DEBT SECURITES
1,856
To adjust bond investment to market.
45
12/31/X4
201
EQUITY SECURITIES-LONG TERM MARKETABLE
1,240
801
MARKET GAIN/LOSS-MKT EQ SEC
1,240
To adust AEP investment to market.
46
12/31/X4
704
EQUIPMENT DEPRECIATION
24,667
172
EQUIPMENT-ACCUMULATED DEPRECIATION
24,667
To record depreciation expense on new equipment.
47
12/31/X4
706
WAREHOUSE DEPRECIATION
10,250
162
BUILDINGS-ACCUMULATED DEPRECIATION
10,250
To record depreciation expense on new warehouse.
48
12/31/X4
753
INTEREST EXPENSE-BOND PAYABLE
13,600
101
CASH
13,600
To record payment of interest to bondholder.
49
12/31/X4
651
SELLING & ADMIN- BAD DEBTS
51,000
108
ALLOWANCE FOR DOUBTFUL ACCOUNTS
51,000
To adjust ADA to needed balance of $51,000.
50
12/31/X4
563
SERVICE COSTS-INDIRECT-LEASE EXPENSE-SHOP BLDG
32,500
602
SELLING & ADMIN-LEASE EXPENSE-OFFICE BLDG
6,500
191
RIGHT-OF-USE ASSET--LEASE-BUILDING
27,259
410
LEASE PAYABLE-BUILDING
11,741
To accrue lease expense and properly apply amortization and interest to balance sheet.
51
12/31/X4
821
INCOME TAX EXPENSE
223,776
314
INCOME TAX PAYABLE
223,776
To record income tax expense for 20X4.
Totals
15,753,173
15,753,173
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