The following are the financial statements issued by Allen Corporation for its fiscal year ended October 31, 2016:

Statement of Retained Earnings
For the Fiscal Year Ended October 31, 2016
Retained earnings, November 1, 2015 ..............$150,000
Gain on sale of equipment, net of income tax ........... 25,000
Net earnings for the fiscal year ended October 31, 2016 ..... 59,260
$234,260
Dividends ($0.3426 per share) ................ (34,260)
Retained earnings, October 31, 2016 .............$200,000
Notes to Financial Statements:
1. Long-Term Lease. Under the terms of a 5-year, noncancelable lease for a building, Allen is obligated to make annual rental payments of $40,000 in each of the next 4 fiscal years.
2. Pension Plan. Substantially all employees are covered by Allen€™s defined benefit pension plan. Pension expense is equal to the total of pension benefits accrued and paid to retired employees during the year. Because it is a defined benefit plan that is paid every year, no pension liability exists.
3. Patent. The patent had an estimated remaining life of 10 years at the time of purchase. Allen€™s patent was purchased from Apex Corporation on January 1, 2016, for $250,000.
4. Deferred Income Tax Payable. The entire balance in the Deferred Income Tax Payable account arose from tax-exempt municipal bonds that were held during the previous fiscal year, giving rise to a difference between tax-able income and reported net earnings for the fiscal year ended October 31, 2016. The deferred liability amount was calculated on the basis of past tax rates.
5. Warrants. On January 1, 2015, one common stock warrant was issued to shareholders of record for each common share owned. An additional share of common stock is to be issued upon exercise of 10 stock warrants and receipt of an amount equal to par value. For the 6 months ended October 31, 2016, the average market value for Allen€™s common stock was $5 per share and no warrants had yet been exercised.
6. Contingent Liability. On October 31, 2016, Allen was contingently liable for product warranties in an amount estimated to aggregate $75,000.
Required:
Review the preceding financial statements and related notes. Identify any inclusions or exclusions from them that would be in violation of GAAP, and indicate corrective action to be taken. Do not comment as to format or style. Respond in the following order:
1. Balance sheet
2. Notes
3. Income statement
4. Statement of retained earnings
5. General

Transcribed Image Text:

Balance Sheet Odober 31, 2016 Assets Cash Accounts receivable, net Invenlory $15,000 150,000 120,000 $285,000 250,000 125,000 660,000 Total current assets Patent (Nole 3) Land Total assets Liabilities Accounts payable Accrued expenses $80,000 20,000 $100,000 80,000 $180,000 Total current liabilities Deferred income tax payable (Note 4) Total liabilities Shareholders Equity Common stock, par $1 (Note 5) Additional paid-in capital Retained eanings $100,000 180,000 200,000 480,000 660,000 Total liabilities and shareholders' equity Income Statement For the Fiscal Year Ended October 31, 2016 Sales Cost of goods sold $1,000,000 750 250,000 Gross margin Expenses Bad debl expense Insurance Lease expenses (Note 1) Repairs and maintenance Pensions (Note 2) Salaries 7,000 13,000 40,000 30,000 12,000 60,000 162,000 Earnings before provision for income tax Provision for income tax Net eamings Earnings per common share outstandingg (28,740 260 6