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

A machine cost $500,000 on April 1, 2010. Its estimated salvage value is $50,000 and its expected life is eight years

A machine cost $500,000 on April 1, 2010. Its estimated salvage value is $50,000 and its expected life is eight years.

Instructions:
Calculate the depreciation expense (to the nearest dollar) by each of the following methods, showing the figures used
a) straight-line for 2010
b) Double-declining balance for 2011
c) Sum-of-the-years digits for 2011


Click here for the solution: A machine cost $500,000 on April 1, 2010

The Sharpe Corporation’s projected sales for the first eight months of 2004 are as follows

4-6A (Cash budget) The Sharpe Corporation’s projected sales for the first eight months of 2004 are as follows:

January $90,000 February $120,000
March $135,000 April $240,000
May $300,000 June $270,000
July $225,000 August $150,000

Of Sharpe’s sales, 10 percent is for cash, another 60 percent is collected in the month following sales, and 30 percent is collected in the second month following sales. November and December sales for 2003 were $220,000 and $175,000, respectively. Sharpe purchases its raw material two months in advance of its sales equal to 60 percent of their final sales price. The supplier is paid one month after it makes delivery. For example, purchase for April sales are made in February and payment is made in March. In addition, Sharpe pays $10,000 per month for rent and $20,000 each month for other expenditures. Tax prepayments of $22,500 are made each quarter, beginning in March. The company’s cash balance at December 31, 2003, was $22,000; a minimum balance of $15,000 must be maintained at all times. Assume that any short-term financing needed to maintain the cast balance is paid off in the month following the month of financing if sufficient funds are available. Interest on short-term loans (12 percent) is paid monthly. Borrowing to meet estimated monthly cash needs takes place at the beginning of the month. Thus, if he month of April the firm expects to have a need for additional $60,500, these funds would be borrowed at the beginning of April with interest of $605 (.12 x ½ x $60,500) owed for April and paid at the beginning of May.

A. Prepare a cash budget for Sharpe covering the first seven months of 2004.
B. Sharpe has a $200,000 in notes payable due in July that must be repaid or renegotiated for an extension. Will the firm have ample cash to repay the notes?


Click here for the solution: The Sharpe Corporation’s projected sales for the first eight months of 2004 are as follows

Eight different types of evidence were discussed

Auditing P 7-32

Eight different types of evidence were discussed. The following questions concern the reliability of that evidence:
a. Explain why confirmations are normally more reliable evidence than inquiries of the client.
b. Describe a situation in which confirmation will be considered highly reliable and another in which it will not be reliable.
c. Under what circumstances is the physical observation of inventory considered relatively unreliable evidence
d. Explain why recalculation tests are highly reliable but of relatively limited use.
e. Give three examples of relatively reliable documentation and three examples of less reliable documentation. What characteristics distinguish the two
f. Give several examples in which the qualifications of the respondent or the qualifications of the auditor affect the reliability of the evidence.
g. Explain why analytical procedures are important evidence even though they are relatively unreliable by themselves.


Click here for the solution: Eight different types of evidence were discussed

Conda Products Company implemented a JIT work environment in its trowel division eight months ago, and the division has been operating at near capacity since then

E 12. Conda Products Company implemented a JIT work environment in its trowel division eight months ago, and the division has been operating at near capacity since then. At the beginning of May, Work in Process Inventory and Finished Goods Inventory had zero balances. The following transactions took place last week:

May 28 Ordered, received, and used handles and sheet metal costing $11,340.
29 Direct labor costs incurred, $5,400.
29 Overhead costs incurred, $8,100.
30 Completed trowels costing $24,800.
31 Sold trowels costing $24,000.

Using backflush costing, calculate the ending balance in the Work in Process Inventory and Finished Goods Inventory accounts


Click here for the solution: Conda Products Company implemented a JIT work environment in its trowel division eight months ago, and the division has been operating at near capacity since then