Assume that you are auditing the financial statements of Agee Corporation. During the course of the...

Assume that you are auditing the financial statements of Agee Corporation. During the course of the audit, you discover the following circumstances.

1. Management of Agee has decided to discontinue the production of consumer electronics, which represents a moderately large line of business for the company.

2. In auditing facility rent expense, you note that the amount is about 30 percent less than in the prior year. When you discuss the matter with management, you are informed that the company previously had leased the building on a 12-month lease. However, the company entered into a 10-year building lease agreement at the beginning of the year (about nine months ago), which provided for no lease payments for the first 4 months of the lease. Therefore, rent expense was less than for the prior year.

3. Management has provided you with the following information about a test of impairment of the company’s clothing and apparel reporting unit and a large piece of equipment used in the consumer products division of the company. The Clothing and Apparel reporting unit has $1,200,000 in goodwill associated with it.

Clothing and Apparel Reporting Unit

Carrying value of the unit $12,600,000

Discounted value of estimated future cash flows 12,200,000

Market value of the unit 11,500,000

Equipment

Carrying value of the equipment $1,200,000

Undiscounted estimated future cash flows 1,250,000

Discounted value of estimated future cash flows 1,000,000

Market value of the equipment 975,000

Required: Describe the implications of each of these circumstances, including any additional information or evidence that the auditors might require to resolve the issues identified.

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