Question

Stoscheck Moving Corporation has been in operation since January 1, 2015. It is now December 31, 2015, the end of the annual accounting period. The company has not done well financially during the first year, although revenue has been fairly good. The three stockholders manage the company, but they have not given much attention to recordkeeping. In view of a serious cash shortage, they have applied to your bank for a $30,000 loan. You requested a complete set of financial statements. The following 2015 annual financial statements were prepared by a clerk and then were given to the bank.


After briefly reviewing the statements and “looking into the situation,” you requested that the statements be redone (with some expert help) to “incorporate depreciation, accruals, inventory counts, income taxes, and so on.” As a result of a review of the records and supporting documents, the following additional information was developed:
a. The Supplies of $4,000 shown on the balance sheet has not been adjusted for supplies used during 2015. A count of the supplies on hand on December 31, 2015, showed $1,800.
b. The insurance premium paid in 2015 was for years 2015 and 2016. The total insurance premium was debited in full to Prepaid Insurance when paid in 2015 and no adjustment has been made.
c. The equipment cost $40,000 when purchased January 1, 2015. It had an estimated annual depreciation of $8,000. No depreciation has been recorded for 2015.
d. Unpaid (and unrecorded) salaries at December 31, 2015, amounted to $3,200.
e. At December 31, 2015, transportation revenue collected in advance amounted to $7,000. This amount was credited in full to Transportation Revenue when the cash was collected earlier during 2015.
f. The income tax rate is 35 percent.

Required:
1. Record the six adjusting entries required on December 31, 2015, based on the preceding additional information.
2. Recast the preceding statements after taking into account the adjusting entries. You do not need to use classifications on the statements. Suggested form for the solution:


3. Omission of the adjusting entries caused:
a. Net income to be overstated or understated (select one) by $ _____ .
b. Total assets on the balance sheet to be overstated or understated (select one) by $ _____ .
c. Total liabilities on the balance sheet to be overstated or understated (select one) by $ _____ .
4. For both of the unadjusted and adjusted balances, calculate these ratios for the company: (a) earnings per share and (b) total asset turnover. There were 10,000 shares outstanding all year. Explain the causes of the differences and the impact of the changes on financial analysis.
5. Write a letter to the company explaining the results of the adjustments, your analysis, and your decision regarding theloan.


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  • CreatedJuly 01, 2014
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