Analyze the following information to prepare a corrected balance sheet for Sabrina 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.
Your firm has been engaged to examine the financial statements of Sabrina Corporation for the year 2008. The bookkeeper who maintains the financial records has prepared all the unaudited financial statements for the corporation since its organization on January 2, 2002. The client provides you with the information below.
AS OF DECEMBER 31, 2008
An analysis of current assets discloses the following.
Cash (restricted in the amount of $400,000 for plant expansion) $ 571,000
Investments in land 185,000
Accounts receivable less allowance of $30,000 480,000
Inventories (LIFO flow assumption) 645,100
Other assets include:
Prepaid expenses $ 47,400
Plant and equipment less accumulated depreciation of $1,430,000 4,130,000
Cash surrender value of life insurance policy 84,000
Unamortized bond discount 49,500
Notes receivable (short-term) 162,300
Current liabilities include:
Accounts payable $ 510,000
Notes payable (due 2010) 157,400
Estimated income taxes payable 145,000
Premium on common stock 150,000
Retained earnings $2,810,600
Capital stock, par value $10; authorized 200,000 shares, 184,000 shares issued 1,840,000
The supplementary information below is also provided.
1. On May 1, 2008, the corporation issued at 93.4, $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 straight-line method for discount amortization.
2. The bookkeeper made the following mistakes.
(a) In 2006, the ending inventory was overstated by $183,000. The ending inventories for 2007 and 2008 were correctly computed.
(b) In 2008, accrued wages in the amount of $275,000 were omitted from the balance sheet and these expenses were not charged on the income statement.
(c) In 2008, a gain of $175,000 (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 Sabrina'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 Sabrina's line. The competitor announced its new line on January 14, 2009. Sabrina 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, 2009, prior to completion of the audit, of heavy damage because of a recent fire to one of Sabrina's two plants; the loss will not be reimbursed by insurance. The newspapers described the event in detail.
1a. The bonds were issued at 93.4% of the $750,000 face value. Therefore, the company received $750,000*.934, or $700,500, a discount of $49,500 ($750,000-$700,500). The bonds were issued on May 1, 2008 and are due on May 1, 2013, so they will be outstanding for 5 years. The monthly amortization of the bond discount is $49,500/(5*12), or $825. The bonds were outstanding for 8 months in 2008, so the 2008 amortization is $825*8=$6,600. Therefore, at December 31, 2008, the outstanding bond premium is $49,500-$6,600, or ...
This solution demonstrates how to adjust the books at year-end and prepare the financial statements, and the effect of subsequent events on the statements.