Question

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 Headland’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 Headland’s 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 Headland’s 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.

Answer 1

Current assets
Cash (566000 - 297000)		269000
Accounts receivable (476000 + 31000)	507000
Less: Allowance for doubtful debts	-31000	476000
Notes receivable		162000
Inventories		637000
Prepaid expenses		64000
Total current assets		1608000
Long Term Investments
Cash restricted for plant expansion		297000
Cash surrender value of Life Insurance Policy		84000
Investment in Land		181000
Property, plant & Equipment
Plant & Equipment (4054000 + 1435000)	5489000
Less: Accumulated Depreciation	-1435000	4054000
Land		438000
Intangible Assets
Goodwill		247000
Total Assets		6909000
Liabilities & Stockholders Equity
Accounts payable		510000
Unearned revenue		492000
Income Tax Payable		144000
Interest Payable (780000 * 8% * 8/12)		41600
Salaries & Wages Payable		224000
Dividends payable		200000
Total Current liabilities		1611600
Long-term liabilities
Notes payable		156000
Bonds Payable	780000
Less: Unamortised Bond Discount	-85176	694824
Total liabilities		2462424
Stockholders’ equity
Common Stock		1830000
Paid in capital in excess of par		149000
Retained earnings		2467576
Total Stockholders’ equity		4446576
Total Liabilities & Stockholders Equity		6909000

Calculation of unamortized bond discount:

Amount of amortization each year = [780000 - (780000 * 87.40%)] / 5 = 19656

Amortization for 8 months = 19656 * 8/12 = 13104

Unamortized bond discount = 98280 - 13104 = 85176

Calculation of retained earnings:

Retained earnings	2746280
Accrued wages omitted	-224000
Accrued interest	-41600
Bond amortization	-13104
	2467576