Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Your firm has been engaged to examine the financial statements of Headland Corporation for the year 2020. The bookkeeper who maintains the financial records has

Your firm has been engaged to examine the financial statements of Headland 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.

Headland Corporation Balance Sheet December 31, 2020

Assets

Liabilities

Current assets

$1,860,000

Current liabilities

$959,000

Other assets

5,147,280

Long-term liabilities

1,472,000

Stockholders equity

4,576,280
$7,007,280 $7,007,280

An analysis of current assets discloses the following.
Cash (restricted in the amount of $297,000 for plant expansion) $566,000
Investments in land 181,000
Accounts receivable less allowance of $31,000 476,000
Inventories (LIFO flow assumption) 637,000
$1,860,000
Other assets include:
Prepaid expenses $64,000
Plant and equipment less accumulated depreciation of $1,435,000 4,054,000
Cash surrender value of life insurance policy 84,000
Unamortized bond discount 98,280
Notes receivable (short-term) 162,000
Goodwill 247,000
Land 438,000
$5,147,280
Current liabilities include:
Accounts payable $510,000
Notes payable (due 2023) 156,000
Estimated income taxes payable 144,000
Premium on common stock 149,000
$959,000
Long-term liabilities include:
Unearned revenue $492,000
Dividends payable (cash) 200,000
8% bonds payable (due May 1, 2025) 780,000
$1,472,000
Stockholders equity includes:
Retained earnings $2,746,280
Common stock, par value $10; authorized 200,000 shares, 183,000 shares issued 1,830,000
$4,576,280

The supplementary information below is also provided.

1. On May 1, 2020, the corporation issued at 87.40, $780,000 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.
2. The bookkeeper made the following mistakes.
a. In 2018, the ending inventory was overstated by $181,000. The ending inventories for 2019 and 2020 were correctly computed.
b. In 2020, accrued wages in the amount of $224,000 were omitted from the balance sheet, and these expenses were not charged on the income statement.
c. In 2020, a gain of $176,000 (net of tax) on the sale of certain plant assets was credited directly to retained earnings.
3. A major competitor has introduced a line of products that will compete directly with Headlands primary line, now being produced in a specially designed new plant. Because of manufacturing innovations, the competitors line will be of comparable quality but priced 50% below Headlands line. The competitor announced its new line on January 14, 2021. Headland 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.
4. You learned on January 28, 2021, prior to completion of the audit, of heavy damage because of a recent fire to one of Headlands two plants; the loss will not be reimbursed by insurance. The newspapers described the event in detail.

Analyze the above information to prepare a corrected balance sheet for Headland 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.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Auditing A Practical Approach

Authors: Robyn Moroney, Fiona Campbell, Jane Hamilton, Valerie Warren

1st Extended Canadian Edition

1118878418, 9781118878415

More Books

Students also viewed these Accounting questions