Question

Problem 24-1 Your firm has been engaged to examine the financial statements of Indigo Corporation for the year 2017. The bookkeeper who maintains the financial records has prepared alll the unaudited financial statements for the corporation since its organization on January 2, 2012. The client provides you with the information below. INDIGO CORPORATION BALANCE SHEET DECEMBER 31, 2017 Liabilities Assets Current assets $1,874,000 Current liabilities $976,000 Other assets 5,240,660 1,470,000 Long-term liabilities Capital 4,668,660 $7,114,660 $7,114,660 An analysis of current assets discloses the following. Cash (restricted in the amount of $300,000 for plant expansion) $564,000 Investments in land 187,000 Accounts receivable less allowance of $29,000 470,000 Inventories (LIFO flow assumption) 653,000 $1,874,000 Other assets include: Prepaid expenses $63,000 Plant and equipment less accumulated depreciation of $1,441,000 4,201,000 Cash surrender value of life insurance policy 83,000 Unamortized bond discount 36,660 Notes receivable (short-term) 160,000 251,000 Goodwill Land 446,000 $5,240,660 Current liabilities include: Accounts payable $519,000 Notes payable (due 2020) 159,000 Estimated income taxes payable 146,000 Premium on common stock 152,000 $976,000 Long-term liabilities include: Unearned revenue $486,000 Dividends payable (cash) 204,000 8% bonds payable (due May 1, 2022) 780,000 $1,470,000 Capital includes: Retained earnings $2,838,660 Common stock, par value $10; authorized 200,000 shares, 183,000 shares issued 1,830,000 $4,668,660 The supplementary information below is also provided. 1. On May 1, 2017, the corporation issued at 95.30, $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 2015, the ending inventory was overstated by $181,000. The ending inventories for 2016 and 2017 were correctly computed (b) In 2017, accrued wages in the amount of $228,000 were omitted from the balance sheet, and these expenses were not charged on the income statement (c) In 2017, a gain of $172,000 (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 Indigo'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 Indigo's line. The competitor announced its new line on January 14, 2018. Indigo 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 Indigo'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 Indigo 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. (List current assets in order of liquidity. Enter account name only and do not provide descriptive information.) Balance Sheet December 31, 2017 Assets Current Assets Cash 264,000 $ Accounts Receivable Less Allowance for Doubtful Accounts Investments in Land Inventories Cash Restricted for Plant Expansion $ $ Liabilities and Stockholders' Equity $ $

Answer 1

Answer:

INDIGO CORPORATION Balance Sheet December 31, 2017
Assets
Current Assets
Cash ($564,000 – $300,000)		264000
Accounts receivable ($470,000 + $29,000)	499000
Less allowance for doubtful accounts	29000	470000
Notes receivable		160000
Inventories (LIFO)		653000
Prepaid expenses		63000
Total current assets			1610000
Long-term investments
Investments in land		187000
Cash surrender value of life insurance policy		83000
Cash restricted for plant expansion		300000	570000
Property, plant, and equipment
Plant and equipment (pledged as collateral for bonds) ($4,201,000 + $1,441,000)	5642000
Less accumulated depreciation	1441000	4201000
Land		446000	4647000
Intangible assets
Goodwill, at cost			251000
Total assets			7078000
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable		519000
Unearned revenue		486000
Dividends payable		204000
Salaries and wages payable		228000
Income taxes payable		146000
Interest payable ($780,000 X 8% X 8/12)		41600
Total current liabilities			1624600
Long-term liabilities
Notes payable (due 2020)		159000
8% bonds payable (secured by plant and equipment)	780000
Less unamortized bond discount (36660-(36660/5*8/12))	31772	748228	907228
Total liabilities			2531828
Stockholders’ equity
Common stock, par value $10 per share; authorized 200,000 shares; 183,000 shares issued and outstanding	1830000
Paid-in capital in excess of par	152000	1982000
Retained earnings (2838660-228000-41600-(36660/5*8/12))		2564172
Total stockholders’ equity			4546172
Total liabilities and stockholders’ equity			7078000