Your firm has been engaged to examine the financial statements of Almaden Corporation for the year 2017. The bookkeeper who maintains the financial records has prepared all the unaudited financial statements for the corporation since its organization on January 2, 2012. The client provides you with the following information.

ALMADEN CORPORATION BALANCE SHEET DECEMBER 31, 2017
Asset		Liabilities
Current assets	\(1,881,100	Current liabilities	\) 962,400
Other assets	5,171,400	Long-term liabilities	1,439,500
		Capital	4,650,600
	\(7,052,500		\)7,052,500

An analysis of current assets discloses the following.

Cash (restricted in the amount of \(300,000 for plant expansion)	\)571,000
Investments in Land	185,000
Accounts receivable less allowance of \(30,000	480,000
Inventories (LIFO flow assumption)	645,100
	\)1,881,100
Other assets include:
Prepaid expenses	\( 62,400
Plant and equipment less accumulated depreciation of \)1,430,000	4,130,000
The cash surrender value of life insurance policy	84,000
Unamortized bond discount	34,500
Notes receivable (short-term)	162,300
Goodwill	252,000
Land	446,200
	\(5,171,400
Current liabilities include:
Accounts payable	\) 510,000
Notes payable (due 2020	157,400
Estimated income taxes payable	145,000
Premium on common stock	150,000
	\( 962,400
Long-term liabilities include
Unearned revenue	\) 489,500
Dividends payable (cash	200,000
8% bonds payable (due May 1, 2022)	750,000
	\(1,439,500
Capital includes:
Retained earnings	\)2,810,600
Common stock, par value \(10; authorized 200,000 shares, 184,000 shares issued	1,840,000
	\)4,650,600

The supplementary information below is also provided.

1. On May 1, 2017, the corporation issued at 95.4, \(750,000 of bonds to finance plant expansion. The long-term bond agreement provided for the annual payment of interest every May 1. The existing plant was pledged as security for the loan. Use the straight-line method for discount amortization.
2. The bookkeeper made the following mistakes.
   1. In 2015, the ending inventory was overstated by \)183,000. The ending inventories for 2016 and 2017 were correctly computed.
   2. In 2017, accrued wages in the amount of \(225,000 were omitted from the balance sheet, and these expenses were not charged on the income statement.
   3. In 2017, a gain of \)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 Almaden’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 Almaden’s line. The competitor announced its new line on January 14, 2018. Almaden 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, 2018, prior to completion of the audit, of heavy damage because of a recent fire to one of Almaden’s two plants; the loss will not be reimbursed by insurance. The newspapers described the event in detail.

Instructions

Analyze the above information to prepare a corrected balance sheet for Almaden 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.

Step by step solution

01

Meaning of Balance sheet

A balance sheet may be a money-related explanation that appears a company's claims and liabilities as well as the sums given by shareholders. The balance sheet can be utilized in conjunction with other imperative money-related clarifications to perform vital examinations or calculate financial ratios.

02

Preparing the balance sheet for Almaden in accordance with proper accounting and reporting principles

ALMADEN CORPORATION Balance Sheet December 31, 2017
Assets
Current assets
Cash ($571,000 – $300,000)	$ 271,000
Accounts receivable ($480,000 + $30,000) $510,000 Less allowance for doubtful accounts 30,000	480,000
Notes receivable	162,300
Inventories (LIFO)	645,100
Prepaid expenses	62,400
Total current assets		$1,620,800
Long-term investments
Investments in Land	185,000
The cash surrender value of life insurance policy	84,000
Cash restricted for plant Expansion	300,000	569,000
Property, plant, and equipment
Plant and equipment (pledged as collateral for bond ($4,130,000 + $1,430,000) 5,560,000 Less accumulated depreciation 1,430,000	4,130,000
Land	446,200	4,576,20
Intangible assets
Goodwill, at cost		252,000
Total assets		$7,018,000
Liabilities
Current liabilities
Accounts payable	510,000
Unearned revenue	489,500
Dividends payable	200,000
Salaries and wages payable	225,000
Income taxes payable	145,000
Interest payable	40,000
Total current liabilities		$1,609,500
Long-term liabilities
Notes payable	157,400
8% bonds payable (secured by plant and equipment) $ 750,000 Less: unamortized bond 29,900	720,100	877,500
Total liabilities
Stockholders’ equity
Common stock, par value $10 per share; authorized 200,000 shares; 184,000 shares issued and outstanding 1,840,000
Paid-in capital in excess of par 150,000	1,990,000
Retained earnings	2,541,000
Total stockholders’ equity		4,531,000
Total liabilities and stockholders’ equity		$7,018,000

Working Notes:

Calculation of interest payable

$\begin{array}{rcl}\mathrm{Interest}\mathrm{payable}& =& \mathrm{Bonds}\mathrm{payable}\times \mathrm{Bonds}\mathrm{rate}\times \mathrm{Total}\mathrm{months}\\ & =& \$750,000\times 8\%\times \frac{8}{12}\\ & =& \$40,000\end{array}$

Calculation of Common stock

$\begin{array}{rcl}\mathrm{Common}\mathrm{stock}& =& \mathrm{Shares}\mathrm{issued}\times \mathrm{par}\mathrm{value}\\ & =& 184,000\times \$10\\ & =& \$1,840,000\end{array}$

Calculation of Unamortized bond

$\begin{array}{rcl}\mathrm{Unamortized}\mathrm{bond}& =& \left[\mathrm{Unamortized}\mathrm{bond}\mathrm{discount}-\left(\frac{\mathrm{Unamortized}\mathrm{bond}\mathrm{discount}}{\mathrm{Number}\mathrm{of}\mathrm{years}}\times \mathrm{Months}\right)\right]\\ & =& \$34,500-\left(\frac{\$34,500}{5}\times \frac{8}{12}\right)\\ & =& \$34,500-\$4,600\\ & =& \$29,900\end{array}$

Calculation of Retained earnings

Retainedearnings	$2,810,600
Accrued wages omitted	(225,000)
Accrued interest	(40,000)
Bond amortization	(4,600)
	$2,541,000

Additional Comments:

1. Since this invention has the potential to have a major impact on the firm, information relating to the competitor must be disclosed. Due to the need to reduce the selling price, the value of the goods has increased. This element, together with the net realizable value of the inventory, must be declared.

1. The pledged asset should be shown in the balance sheet or footnote, as shown.

1. The stock count error would have been corrected. Thus, no changes are needed.

1. Salary and wages are included as risk, and profits are kept at a lower level.

1. The fact that profit on the sale of certain plant assets was explicitly attributed to retained earnings has no bearing on the appearance of the balance sheet.

1. Technically, plant and equipment accounts should be declared separately, and depreciation should be calculated for each item separately. Despite this, the information needed to split the accounts was not provided in this instance.

1. The $40,000 in interest payable on the bonds was never reported. This amount will also reduce the profit margin. The $4,600 exemption would reduce the amortization markdown account as well as retained earnings.

1. This event does not represent the conditions that existed at the date of the balance sheet because the substantial injury resulting from the fire occurred after that date. As a result, no changes are required in the financial statements. In either instance, the tragedy must be disclosed in a letter, especially since financial statement subscribers who may have read about the fires in the daily newspaper will be looking for information on the financial implications.

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