Your firm has been engaged to examine the financial statements of Pharoah 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. (See image #1 - Balance sheet) An analysis of current assets discloses the following. Cash (restricted in the amount of $302,000 for plant expansion) $559,000 Investments in land 184,000 Accounts receivable less allowance of $30,000 476,000 Inventories (LIFO flow assumption) 653,000 $1,872,000 Other assets include: Prepaid expenses $64,000 Plant and equipment less accumulated depreciation of $1,433,000 4,098,000 Cash surrender value of life insurance policy 83,000 Unamortized bond discount 51,840 Notes receivable (short-term) 165,000 Goodwill 253,000 Land 442,000 $5,156,840 Current liabilities include: Accounts payable $512,000 Notes payable (due 2023) 157,000 Estimated income taxes payable 142,000 Premium on common stock 153,000 $964,000 Long-term liabilities include: Unearned revenue $484,000 Dividends payable (cash) 196,000 8% bonds payable (due May 1, 2025) 720,000 $1,400,000 Stockholders’ equity includes: Retained earnings $2,814,840 Common stock, par value $10; authorized 200,000 shares, 185,000 shares issued 1,850,000 $4,664,840 The supplementary information below is also provided. 1. On May 1, 2020, the corporation issued at 92.80, $720,000 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 $182,000. The ending inventories for 2019 and 2020 were correctly computed. b. In 2020, accrued wages in the amount of $221,000 were omitted from the balance sheet, and these expenses were not charged on the income statement. c. In 2020, a gain of $174,000 (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 Pharoah’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 Pharoah’s line. The competitor announced its new line on January 14, 2021. Pharoah 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 Pharoah’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 Pharoah 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.) (See image 2 for format)

Your firm has been engaged to examine the financial statements of Pharoah 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. (See image #1 - Balance sheet) An analysis of current assets discloses the following. Cash (restricted in the amount of $302,000 for plant expansion) $559,000 Investments in land 184,000 Accounts receivable less allowance of $30,000 476,000 Inventories (LIFO flow assumption) 653,000 $1,872,000 Other assets include: Prepaid expenses $64,000 Plant and equipment less accumulated depreciation of $1,433,000 4,098,000 Cash surrender value of life insurance policy 83,000 Unamortized bond discount 51,840 Notes receivable (short-term) 165,000 Goodwill 253,000 Land 442,000 $5,156,840 Current liabilities include: Accounts payable $512,000 Notes payable (due 2023) 157,000 Estimated income taxes payable 142,000 Premium on common stock 153,000 $964,000 Long-term liabilities include: Unearned revenue $484,000 Dividends payable (cash) 196,000 8% bonds payable (due May 1, 2025) 720,000 $1,400,000 Stockholders’ equity includes: Retained earnings $2,814,840 Common stock, par value $10; authorized 200,000 shares, 185,000 shares issued 1,850,000 $4,664,840 The supplementary information below is also provided. 1. On May 1, 2020, the corporation issued at 92.80, $720,000 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 $182,000. The ending inventories for 2019 and 2020 were correctly computed. b. In 2020, accrued wages in the amount of $221,000 were omitted from the balance sheet, and these expenses were not charged on the income statement. c. In 2020, a gain of $174,000 (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 Pharoah’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 Pharoah’s line. The competitor announced its new line on January 14, 2021. Pharoah 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 Pharoah’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 Pharoah 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.) (See image 2 for format)

Intermediate Accounting: Reporting And Analysis

3rd Edition

ISBN:9781337788281

Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Publisher:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Chapter21: The Statement Of Cash Flows

Section: Chapter Questions

Problem 7MC

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Question

(See image #1 - Balance sheet)

An analysis of current assets discloses the following.
Cash (restricted in the amount of $302,000 for plant expansion)		$559,000
Investments in land		184,000
Accounts receivable less allowance of $30,000		476,000
Inventories (LIFO flow assumption)		653,000
		$1,872,000

Other assets include:
Prepaid expenses		$64,000
Plant and equipment less accumulated depreciation of $1,433,000		4,098,000
Cash surrender value of life insurance policy		83,000
Unamortized bond discount		51,840
Notes receivable (short-term)		165,000
Goodwill		253,000
Land		442,000
		$5,156,840

Current liabilities include:
Accounts payable		$512,000
Notes payable (due 2023)		157,000
Estimated income taxes payable		142,000
Premium on common stock		153,000
		$964,000

Long-term liabilities include:
Unearned revenue		$484,000
Dividends payable (cash)		196,000
8% bonds payable (due May 1, 2025)		720,000
		$1,400,000

Stockholders’ equity includes:
Retained earnings		$2,814,840
Common stock, par value $10; authorized 200,000 shares, 185,000 shares issued		1,850,000
		$4,664,840

The supplementary information below is also provided.

1. On May 1, 2020, the corporation issued at 92.80, $720,000 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 $182,000. The ending inventories for 2019 and 2020 were correctly computed.

b. In 2020, accrued wages in the amount of $221,000 were omitted from the balance sheet, and these expenses were not charged on the income statement.

c. In 2020, a gain of $174,000 (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 Pharoah’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 Pharoah’s line. The competitor announced its new line on January 14, 2021. Pharoah 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 Pharoah’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 Pharoah 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.)

(See image 2 for format)

PHAROAH CORPORATION
Balance Shaat
Acate
Liabilties and Stockholder Eguty
> >
> > > >
> >
> >
> >

Pharoah Corporation
Balance Sheet
December 31, 2020
Assets
Liabilities
Current assets
$1,872,000
Current liabilities
$964,000
Other assets
5,156,840
Long-term liabilities
1,400,000
Stockholders' equity
4,664,840
$7,028,840
$7,028,840
An analysis of current assets discloses the following.
Cash (restricted in the amount of $302,000 for plant expansion)
$559,000
Investments in land
184,000
Accounts receivable less allowance of $30,000
476,000
Inventories (LIFO flow assumption)
653,000
$1,872,000

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