The choice of eight years for straight-line depreciation of the company's trucks appears unreasonable

Audit Evidence and Conclusions for Various Fixed Asset Questions

Audit Conclusions or Situations

1. The choice of eight years for straight-line depreciation of the company's trucks appears unreasonable. I would suggest that the client change to a six-year life and use DDB depreciation.

2. Insurance coverage appears to be inadequate, because the client has chosen to carry only liability insurance on the cement trucks. There is no provision for collision or damage done to the trucks.

3. The client acquired a substantial piece of real estate from the town of Baraboo to build a warehouse in the town's new industrial complex. The land was donated to the company provided it maintains operations for a minimum of ten years and pays real estate taxes on its appraised value. The land is carried on the books at the fair market value at the time of donation of $250,000.

4. Several pieces of idle equipment were noted. It is recommended that the equipment be written down to the scrap value of $50,000 from the current net book value of $185,000.

5. The company has self-constructed the warehouse located in the town of Baraboo. It has capitalized all payroll expense directly related to construction of the project. The adjusting entry debited Building for $73,000 and credited Payroll Expense for the same amount.

6. The company completely overhauled ten of its trucks at a significant cost. The overhaul should extend the life of the trucks by at least three years. Because the company performs similar overhauls each year, the cost has been properly charged to repairs and maintenance.

7. The company sold 15 of its old trucks to Virgin Distributors, a new company owned by the brother of the company's chief executive officer. The equipment was old, and a gain of $70,000 on the sale was credited to income.

Required
a. For each conclusion or situation listed, identify the type of audit evidence needed to support the auditor's conclusion.
b. Briefly indicate the audit implications if the auditor's conclusion is justified.


Click here for the solution: The choice of eight years for straight-line depreciation of the company's trucks appears unreasonable

At December 31, 2010, Cord Company's plant asset and accumulated depreciation and amortization accounts had balances as follows

P11-2 Comprehensive problem; Chapters 10 and 11

At December 31, 2010, Cord Company's plant asset and accumulated depreciation and amortization accounts had balances as follows:

Depreciation is computed to the nearest month and residual values are immaterial. Transactions during 2011 and other information:

AND SO ON

a. On January 6, 2011, a plant facility consisting of land and building was acquired from King Corp. in exchange for 25,000 shares of Cord's common stock. On this date, Cord's stock had a fair value of $50 a share. Current assessed values of land and building for property tax purposes are $187,500 and $562,500, respectively.
b. On March 25, 2011, new parking lots, streets, and sidewalks at the acquired plant facility were completed at a total cost of $192,000. These expenditures had an estimated useful life of 12 years.
c. The leasehold improvements were completed on December 31, 2007, and had an estimated useful life of eight years. The related lease, which would terminate on December 31, 2013, was renewable for an additional four-year term. On April 29, 2011, Cord exercised the renewal option.
d. On July 1, 2011, machinery and equipment were purchased at a total invoice cost of $325,000. Additional costs of $10,000 for delivery and $50,000 for installation were incurred.
e. On August 30, 2011, Cord purchased a new automobile for $12,500.
f. On September 30, 2011, a truck with a cost of $24,000 and a carrying amount of $9,100 on date of sale was sold for $11,500. Depreciation for the nine months ended September 30, 2011, was $2,650.
g. On December 20, 2011, a machine with a cost of $17,000 and a book value of $2,975 at date of disposition was scrapped without cash recovery.

Required:
1. Prepare a schedule analyzing the changes in each of the plant asset accounts during 2011. This schedule should include columns for beginning balance, increase, decrease, and ending balance for each of the plant asset accounts. Do not analyze changes in accumulated depreciation and amortization.
2. For each asset category, prepare a schedule showing depreciation or amortization expense for the year ended December 31, 2011. Round computations to the nearest whole dollar.


Click here for the solution: At December 31, 2010, Cord Company's plant asset and accumulated depreciation and amortization accounts had balances as follows

In its 2010 income statement, Cohen Corp. reported depreciation of $1,110,000 and interest revenue on municipal obligations of $210,000

In its 2010 income statement, Cohen Corp. reported depreciation of $1,110,000 and interest revenue on municipal obligations of $210,000. Cohen reported depreciation of $1,650,000 on its 2010 income tax return. The difference in depreciation is the only temporary difference, and it will reverse equally over the next three years. Cohen's enacted income tax rates are 35% for 2010, 30% for 2011, and 25% for 2012 and 2013. What amount should be included in the deferred income tax liability in Hertz's December 31, 2010 balance sheet?

Click here for the solution: In its 2010 income statement, Cohen Corp. reported depreciation of $1,110,000 and interest revenue on municipal obligations of $210,000

During the year, Xero, Inc., experienced an increase in net fixed assets of $300,000 and had depreciation of $200,000

During the year, Xero, Inc., experienced an increase in net fixed assets of $300,000 and had depreciation of $200,000. It also experienced an increase in current assets of $150,000 and an increase in accounts payable and accruals of $75,000. If operating cash flow (OCF) for the year was $700,000, calculate the firm’s free cash flow (FCF) for the year.

Click here for the solution: During the year, Xero, Inc., experienced an increase in net fixed assets of $300,000 and had depreciation of $200,000

(Computing and recording units-of-production depreciation) Brees Corporation purchased a delivery van for $ 35,500 in 2010

Problem 6-27 Computing and recording units-of-production depreciation

Brees Corporation purchased a delivery van for $ 35,500 in 2010. The firm’s financial condition immediately prior to the purchase is shown in the following horizontal statements model.
The van was expected to have a useful life of 150,000 miles and a salvage value of $ 5,500. Actual mileage was as follows.

2010 50,000
2011 70,000
2012 58,000

Required
a. Compute the depreciation for each of the three years, assuming the use of units-of-production depreciation.
b. Assume that Brees earns $ 21,000 of cash revenue during 2010. Record the purchase of the van and the recognition of the revenue and the depreciation expense for the first year in a financial statements model like the preceding one.
c. Assume that Brees sold the van at the end of the third year for $ 4,000. Calculate the amount of gain or lose from the sale.

Check: a. Depreciation Expense, 2010: $ 10,000 c. Loss on Sale: $(1,500)

Click here for the solution: (Computing and recording units-of-production depreciation) Brees Corporation purchased a delivery van for $ 35,500 in 2010

The Hunter Company purchased a light truck on January 2, 2010 for $18,000

Problem 11-11 (P11-11) Depreciation for Financial Statements and Income Tax Purposes

The Hunter Company purchased a light truck on January 2, 2010 for $18,000. The truck, which will be used for deliveries, has the following characteristics: Estimated life: 5 years Estimated residual value: $3,000 Depreciation for financial statements: straight-line Depreciation for income tax purposes: MARCS (three- year-life) From 2010 through 2014, each year, the company had sales of $100,000, cost of goods sold of $60,000, and operating expenses (excluding depreciation) of $15,000. The truck was disposed of on December 31, 2014 for $2,000.

1. Prepare an income statement for financial reporting through pretax accounting income for each of the five years, 2010 through 2014.
2. Prepare, an income statement for income tax purposes through taxable income for each of the five years, 2010 through 2014.
3. Compare the total income for all five years under requirement 1 and Requirement 2.

Click here for the solution: The Hunter Company purchased a light truck on January 2, 2010 for $18,000

During 2010 the controller of the Ryel Company asked you to prepare correcting journal entries for the following three situations

Problem 11-14 (P11-14) Changes and Corrections of Depreciation

During 2010 the controller of the Ryel Company asked you to prepare correcting journal entries for the following three situations:

1. Machine A was purchased for $50,000 on January 1, 2005. Straight-line depreciation has been recorded for 5 years, and the Accumulated depreciation account has a balance of $25,000. The estimated residual value remains at $5,000, but the service life is now estimated to be one year longer than estimated originally.

2. Machine B was purchased for $40,000 on January 1, 2008. It had an estimated residual value of $5,000 and an estimated service life of 10 years. It has been depreciated under the double-declining-balance method for two years. Now, at the beginning of the third year, Ryel has decided to change to the straight-line method.

3. Machine C was purchased for $20,000 on January 1, 2009. Double-declining-balance depreciation has been recorded for one year. The estimated residual value of the machine is $2,000 and the estimated service life is five years. The computation of the depreciation erroneously included the estimated residual value.

Prepare the necessary correcting journal entries for each situation. Also prepare the journal entry necessary for each situation to record the depreciation for 2010. (Assume that the debit is to Depreciation Expense.)

Click here for the solution: During 2010 the controller of the Ryel Company asked you to prepare correcting journal entries for the following three situations