getting caught up on the many matters | My Assignment Tutor

REQUIREMENT 7It 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 wasgone. Near the middle of a stack of messages, he found a note from Nick Riley. Nick requestedan appointment with Tom and you. Tom arranged a meeting with Nick, Ray, Jerry, and you for2:00 P.M. the next day at Aguamaint.Once the meeting began, Nick reminded Tom of a pickleball engagement and then got down tobusiness. 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 alsobegun selling inventory parts separate from the maintenance work.Tom asked what steps had been taken to expand their customer base. Ray replied thatAguamaint had acquired a 20 percent interest in the small dealership, PVCO, which carried theirline of pumps and valves. Ray also had been appointed a member of PVCO’s board. This newinvestment would give Aguamaint the opportunity to observe and learn the equipment supplybusiness first hand. If things went well, Aguamaint would later consider acquiring the remaininginterest in the dealership.Ray indicated that Aguamaint had paid more than book value for the stock because PVCOowned an important patent that had been developed internally that was not included in theirfinancial statements. The patent has a remaining life of 4 years. You also learned later fromLinda Durkee that the equity method of accounting was not allowed for tax purposes. For taxpurposes, such investments were recorded at cost, and the only income reported came fromdividends. 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 totake on the construction of a water treatment plant for a small town nearby. As it happened, awarehouse had come up for sale just a block away from the shop, and although it was largerthan what they needed to house the inventory items, the extra space was perfect for setting upthe facility needed to support construction projects. The warehouse was purchased on March15, 20X4. All equipment needed to move and store the inventory and to perform the workrelated to the construction of the water treatment plant was purchased and put into use on thesame date.The financing for these investments was provided in part by a local investor who had beenNick’s college roommate and was a trusted friend. He has been so impressed by the growth andpotential of Aguamaint, that he was eager to negotiate a convertible bond, with the idea ofbecoming an owner in the future if the company continued on its current path. The bond was setup with the same covenants that the Bank had required on the note, and also required that theannual financial statements would be audited instead of reviewed as in the first three years. Thebond was set up to convert to 3,400 shares of common stock any time after two years of the fiveyear term.Jerry hoped that Lake & Lock would accept the engagement and that you would conduct theaudit. Although the thought of one more time crossed your mind, the engagement wasaccepted. 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 thatLake & Lock be involved with the year-end physical inventory. This prompted Jerry to askwhether expanding the line of merchandise and doing construction would put Aguamaint in twoor 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 waswell underway. On January 16, 20X5, Jerry sent you copies of the financial statements andrelated schedules, and a pre-audit meeting was scheduled for January 19.REQUIRED:The journal entries and financial statements prepared by Jerry Loos are attached. Reviewthese data and prepare a list of additional information needed from Jerry. Be as specific aspossible and phrase your requests in the form of questions as they normally would be asked ofa 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 changesin stockholders’ equity, financial statement notes, and earnings per share disclosures once theaudit is complete. He also reminded you that the Bank wants comparative statements andrequires the fair value of all financial instruments and information on major customers bedisclosed.20X4CURRENT ASSETSCash $ 320,423Accounts receivable 392,100Allowance for doubtful accounts (36,000)Inventory 333,748Supplies on hand 14,845Prepaid insurance 427Total Current Assets 1,025,543PROPERTY, PLANT, AND EQUIPMENT Land134,000EquipmentAccumulated depreciation–equipmentVehiclesAccumulated depreciation–vehiclesWarehouseAccumulated depreciation–warehouseTotal Property, Plant, and Equipment190,700(49,067)258,000(126,400)410,000(10,250)806,983 RIGHT OF USE ASSETSOperating lease-building 235,379Finance lease-trucks 73,442Total Right of Use Assets 308,821INTANGIBLE ASSETSLicense agreement 35,200Total Intangible Assets 35,200OTHER ASSETS Marketable equity investment216,885AFS bond investment100,556Long-term investment415,000Deferred income tax56,186 Total Other Assets 788,627TOTAL ASSETS $ 2,965,174DECEMBER 31, 20X4BALANCE SHEETASSETSAGUAMAINT, INC.BALANCE SHEETAGUAMAINT, INC.DECEMBER 31, 20X4LIABILITIESCURRENT LIABILITIESAccounts payable $ 136,652Wages payable 36,800Interest payable–note 6,053Interest payable–finance lease 7,528Income tax payable 124,731Short term portion of long term debt 53,424Short term portion of operating lease payable 39,000Short term portion of finance lease payable 21,553Deferred contract revenue 173,800Total Current Liabilities 599,541LONG-TERM LIABILITIESNote payable 56,629Operating lease payable 196,379Finance lease payable 45,146Bond payable 544,000Discount and debt issue costs on bond payable (7,087)Pension liability 66,866Warranty liability 151Total Long-term Liabilities 902,084Total Liabilities 1,501,625STOCKHOLDERS’ EQUITY Common stock150,000Retained earningsAccumulated other comprehensive incomeTotal Stockholders’ Equity1,458,725(145,176)1,463,549 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 2,965,174LIABILITIES AND STOCKHOLDERS’ EQUITY20X4Service contract revenue $ 3,041,000Sales revenue 1,242,000Construction revenue (Note 14) 167,000Total revenue 4,450,000 Cost of services sold1,251,944Cost of goods sold864,810Construction cost of goods sold (Note 14)176,221 Cost of goods sold 2,292,975Gross profit 2,157,025Operating expensesSelling and administrative 968,386Depreciation and amortization 111,902Total operating expenses 1,080,289Operating income 1,076,736Other income (expense) Investment income (loss)Interest expenseTotal other income (expense)14,340(25,475)(11,135) Operating income before income taxes 1,065,601Income tax expense (223,776)Net income $ 841,825STATEMENT OF INCOMEFOR THE YEAR ENDING DECEMBER 31, 20X4AGUAMAINT, INC. J/E #DATEACCT #ACCOUNT NAMEDEBITCREDIT11/1/X4410LEASE PAYABLE-BUILDING39,000101CASH39,000To record operating lease payment on shop and office building.22/1/X4412LEASE PAYABLE-TRUCKS26,198101CASH26,198To record finance lease payment on truck.32/1/X4311INTEREST PAYABLE-NOTES9,627401LONG-TERM DEBT-NOTES50,400101CASH60,027To record annual payment on note.42/1/X4132PREPAID INSURANCE160610SELLING & ADMIN-INSURANCE4,960101CASH5,120To purchase annual insurance policy.5523COST OF GOODS SOLD-WAREHOUSE RENT7,500101CASH7,500To record payment of rent on warehouse.63/15/X4151LAND134,000161BUILDINGS410,000171EQUIPMENT148,000101CASH692,000To record purchase of warehouse, forklifts, conveyor belts, and construction equipment.76/1/X4202EQUITY SECURITIES-EQUITY METHOD INTEREST415,000101CASH415,000To record purchase of investment in affiliate PVCO.86/30/X4101CASH1,500750INTEREST REVENUE-AFS DEBT SEC1,500To record receipt of semi-annual interest on AFS bond investment.97/1/X4101CASH535,163754DEBT ISSUE EXPENSE1,750404DISCOUNT AND DEBT ISSUE COSTS ON BOND PAYABLE7,087403LONG-TERM DEBT-BONDS544,000To record convertible bond issue.10108ALLOWANCE FOR DOUBTFUL ACCOUNTS46,000105ACCOUNTS RECEIVABLE46,000To write off uncollectible accounts.11101CASH355,000105ACCOUNTS RECEIVABLE2,764,000335DEFERRED CONTRACT REVENUE78,000505SERVICE REVENUE FROM CONTRACTS WITH CUSTOMERS3,041,000To record service revenue for 20X4.AGUAMAINT, INC.JOURNAL ENTRIESDECEMBER 31, 20X4 12121MERCHANDISE INVENTORY946,330301ACCTS PAY-INVENTORIABLE COSTS946,330To record purchase of inventory via air freight.13105ACCOUNTS RECEIVABLE1,242,000501SALES REVENUE1,242,000To record sales revenue for 20X4.14521COST OF GOODS SOLD-INVENTORY794,880121MERCHANDISE INVENTORY794,880To record cost of inventory sold.15101CASH1,146,900105ACCOUNTS RECEIVABLE1,146,900To record customer payments on account for merchandise sales.16101CASH2,624,000105ACCOUNTS RECEIVABLE2,624,000To record client payments on account for service contracts.17560SERVICE COSTS-DIRECT-CREW WAGES728,721305WAGES PAYABLE15,140305WAGES PAYABLE27,930101CASH715,931To record payment and accrual of wage expense.18561SERVICE COSTS-INDIRECT-SHOP WAGES308,700305WAGES PAYABLE5,024305WAGES PAYABLE8,870101CASH304,854To record payment and accrual of wage expense.19631SELLING & ADMINISTRATIVE-OTHER14,005611SELLING & ADMIN-OFFICERS SALARIES202,800612SELLING & ADMIN-OTHER SALARIES65,020609SELLING & ADMIN-PROFESSIONAL FEES8,381615SELLING & ADMIN-PAYROLL AND OTHER TAXES123,260607SELLING & ADMIN-SUPPLIES12,980101CASH426,445To record payment of various selling and administrative expenses.20562SERVICE COSTS-INDIRECT-SHOP UTILITIES30,345601SELLING & ADMIN-UTILITIES6,069101CASH36,414To record payment of utilities.21553SERVICE COSTS-DIRECT-FUEL82,050101CASH82,050To record fuel purchases.22129SUPPLIES ON HAND890564SERVICE COSTS-INDIRECT-SUPPLIES54,869302ACCTS PAY-SUPPLIERS-OTHER COSTS55,759To record purchase of supplies and adjustment of year end balance.23302ACCTS PAY-SUPPLIERS-OTHER COSTS50,574314INCOME TAX PAYABLE44,467101CASH95,041To record payment to suppliers and to IRS for taxes. 24554SERVICE COSTS-DIRECT-R AND M14,760101CASH14,760To record payment of repairs and maintenance costs.25603SELLING & ADMIN-MEDICAL BENEFITS47,190101CASH47,190To record purchase of health insurance policy.26314INCOME TAX PAYABLE99,045101CASH99,045Record payment of estimated 20X4 taxes based on 90% of 20X3 current tax payable.27522COST OF GOODS SOLD-AIR FREIGHT62,430101CASH62,430To record payment of air freight bill.28613SELLING & ADMIN-SALES SAL & COMM37,260101CASH37,260To record payment of sales salaries and commissions.29614SELLING & ADMIN- WAREHOUSE WAGES241,540101CASH241,540To record payment of warehouse wages.30301ACCTS PAY-INVENTORIABLE COSTS828,230101CASH828,230To record payment to inventory supplier.31581COST OF CONSTRUCTION176,221101CASH176,221To record cost of water plant construction project to date.32101CASH167,000511CONSTRUCTION REVENUE FROM CONTRACTS WITH CUSTOMERS167,000To record receipt of monthly billings on water plant project.33422WARRANTY LIABILITY2,203101CASH2,203To record payment to repair and replace pump and valve inventory items.34101CASH3,700805INVESTMENT INCOME-INVEST IN AFFILIATE3,700To record receipt of affiliate PVCO dividends.35101CASH6,400804DIVIDEND INCOME-MKT EQ SEC-LT6,400To record receipt of dividends on AEP shares.3612/31/X4101CASH1,500750INTEREST REVENUE-AFS DEBT SEC1,500To record receipt of semi-annual interest on AFS bond investment.3712/31/X4701TRUCK DEPRECIATION43,867182VEHICLES-ACCUMULATED DEPRECIATION43,867To record annual depreciation expense on trucks. 3812/31/X4704EQUIPMENT DEPRECIATION6,100172EQUIPMENT-ACCUMULATED DEPRECIATION6,100To record annual depreciation expense on office equipment.3912/31/X4710AMORTIZATION OF LICENSING COSTS3,200197LICENSE3,200To record annual amortization of licensing cost.4012/31/X4708AMORTIZATION OF RIGHT-OF-USE ASSETS23,819758INTEREST EXPENSE-LEASE PAYABLE3,270193RIGHT-OF-USE ASSET–LEASE-TRUCKS23,819312INTEREST PAYABLE-FINANCE LEASE LIABILITY3,270To record amortization and interest expense on finance lease for truck.4112/31/X4751INTEREST EXPENSE-NOTE PAYABLE6,855311INTEREST PAYABLE-NOTES6,855To accrue interest expense on note payable.4212/31/X4616SELLING & ADMIN-PENSION SERVICE COST147,422414PENSION LIABILITY37,422101CASH110,000To record annual pension expense and payment to pension trustee.4312/31/X4401LONG-TERM DEBT-NOTES3,024321SHORT-TERM PORTION OF L-T NOTES3,024To reclassify needed amount to current portion per amortization schedule.4412/31/X4205DEBT SECURITIES-AFS MARKETABLE1,856473ACCUM OCI-MARKET GAIN/LOSS-AFS DEBT SECURITES1,856To adjust bond investment to market.4512/31/X4201EQUITY SECURITIES-LONG TERM MARKETABLE1,240801MARKET GAIN/LOSS-MKT EQ SEC1,240To adust AEP investment to market.4612/31/X4704EQUIPMENT DEPRECIATION24,667172EQUIPMENT-ACCUMULATED DEPRECIATION24,667To record depreciation expense on new equipment.4712/31/X4706WAREHOUSE DEPRECIATION10,250162BUILDINGS-ACCUMULATED DEPRECIATION10,250To record depreciation expense on new warehouse.4812/31/X4753INTEREST EXPENSE-BOND PAYABLE13,600101CASH13,600To record payment of interest to bondholder.4912/31/X4651SELLING & ADMIN- BAD DEBTS51,000108ALLOWANCE FOR DOUBTFUL ACCOUNTS51,000To adjust ADA to needed balance of $51,000.5012/31/X4563SERVICE COSTS-INDIRECT-LEASE EXPENSE-SHOP BLDG32,500602SELLING & ADMIN-LEASE EXPENSE-OFFICE BLDG6,500191RIGHT-OF-USE ASSET–LEASE-BUILDING27,259410LEASE PAYABLE-BUILDING11,741To accrue lease expense and properly apply amortization and interest to balance sheet.5112/31/X4821INCOME TAX EXPENSE223,776314INCOME TAX PAYABLE223,776To record income tax expense for 20X4.Totals15,753,17315,753,173

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