Problem: You recently joined the internal audit department of Kay Sportswear. For your first assignment, you are asked to examine the balance sheet prepared by the company’s accountant.
In the course of your examination you uncover the following information pertaining to the balance sheet:
Kay Sportswear Corporation
Balance Sheet
At December 31, 2010
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Assets
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Current assets:
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Cash
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$220,000
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Accounts receivable, net
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340,000
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Note receivable
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80,000
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Inventories
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600,000
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Prepaid expenses
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40,000
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Total current assets
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$1,280,000
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Other assets:
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Land
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$500,000
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Buildings, net
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2,056,000
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Equipment, net
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400,000
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Investments
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50,000
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Patent
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60,000
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Total other assets
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3,066,000
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Total assets
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$4,346,000
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Liabilities and Shareholders' Equity
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Current liabilities:
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Accounts payable
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$165,000
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Salaries payable
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75,000
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Interest payable
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45,000
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Total current liabilities
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285,000
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Long-term liabilities:
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Note payable
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$300,000
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Bonds payable
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500,000
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Unearned revenue
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80,000
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Total long-term liabilities
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880,000
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Shareholders' Equity:
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Common Stock
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$2,000,000
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Retained earnings
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1,181,000
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Total shareholders' equity
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3,181,000
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Total liabilities and shareholders equity
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$4,346,000
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- The land and buildings represent the corporate headquarters and manufacturing facilities.
- The note receivable is due in 2012. The balance of $80,000 includes $5,000 of accrued interest. The next interest payment is due in July, 2011.
- The note payable is due in installments of $50,000 per year. Interest on both the notes and bonds is payable annually.
- The company's investments consist of marketable equity securities of other corporations. Management does not intend to liquidate any investments in the coming year.
- Unearned revenue will be earned ratably (equally) over the next two years.
Required:
1. Identify and explain the deficiencies in the balance sheet prepared by the company's accountant. A revised balance sheet is not required.
2. Identify and explain any items reported that require additional disclosure, either on the face of the statement or in a note.