Sorenson manufacturing corporation eas incorporated on Jan, 3 2013. The corporation financial statement for its fist year operation was not examined by a CPA. You have been engaged to audit the financial statement for the year ended December 31, 2014, and your work is substantially completed. A partial trail balance of the company accounts follows:
Dr. CrCash $11,000
Accounts receivable 42,500
Allowable for doubtful debt $500
Inventories 38,500
Machinery 75,000
Equipment 29,000
Accumulated depreciation 10,000
Patents 85,000
Leasehold 26,000
Prepaid expenses 10,500
Organizational expenses 29,000
Goodwill 24,000
Licensing Agreement No. 1 50,000
Licensing Agreement No. 2 49,000
The following information relates to accounts that may yet require adjustment
1. Patents s for Sorenson's manufacturing process ware purchase Jan 2, 2014, at a cost of $68,000. An additional $17,000 was spent in December 2012 to improve machinery covered by the patent and charged to the Patents account. The Patent had a remaining legal term of 17yrs
2. In December 2013 an explosion include a permanent 60% reduction in the expected revenue producing value of licensing agreement no. 1 and in Jan 2014, a flood cause additional damage which rendered the agreement worthless
3. A study of Licensing Agreement No. 2 made by Sorenson on Jan 2014 revealed that its estimated remaining life expectancy was only 10 yrs as of an. 1, 2014
4. The balance in the Goodwill accounts included $24,000 paid December 30,2013, for an advertising program which is estimated will assist in increasing Sorenson sales over a period of 4yrs following the disbursement
5. The Leasehold improvement accounts included
a) the $15,000 cost of improvements with s total estimated useful life of 12 yrs, which Sorenson, as tenant made to leased premises in Jan 2013
b. movable assemble-line equipment costing $8,500 which was installed in the leased premises in Dec 2014 and
c) real estate taxed of $2,500 paid by Soreson which under the terms of the lease should have been paid by the landlords.
Sorenson paid its rent in full during 2014. A 10-year nonrenewable lease was signed Jan. 3, 2013 for the lease building that Sorenson used in manufacturing operations
6. The balance in the organization expenses accounts includes pre operating cost incurred during the organizations period
RequiredFor each of the items 1-6:
a. Prepare adjustment entries as necessary.
b. Identify the substantive audit procedures you would perform to test the transaction.