AGUAMAINT, INC. Requirement 3 In early December 20X2, Nick Riley called Tom Fasbee to tell him that, in addition to meeting several other criteria, Aguamaint's loan covenants required annual financial statements be submitted to the bank. Regina Sontag at Midwest Regional Bank had reminded Nick that the statements must be reviewed by a CPA and that the review and related report should be comparable to what Lake & Lock had done last year. In addition, the bank requested comparative financial statements, including notes that provide the fair value of all financial instruments and information on major customers. Nick wanted to know if Lake & Lock would do the work again. Tom said his firm would be delighted to do it. Nick then requested that Tom send out the same person. He indicated that Aguamaint's people knew you and had confidence in your ability. Tom indicated that Nick's staffing request would be "no problem."

You, of course, were happy to be called on again. You made arrangements with Jerry Loos to obtain financial statements as early as possible in 20X3. You received Aguamaint's 20X2 financial statements on Wednesday, January 13. A preliminary review revealed the large crew truck investment made earlier in the year. You decided that a quick stop at Linda Durkee's office would be appropriate. Linda represented Lake & Lock on Aguamaint's tax work. You asked Linda how the crew trucks would be depreciated for tax purposes. She indicated that they would be depreciated using the 5-year half year convention Modified Accelerated Cost Recovery System (MACRS) schedule. She also reminded you that the Shop Equipment purchased last year is being depreciated using the 7-year half year convention MACRS schedule. She also noted that she understood that all items classified as property, plant, and equipment are depreciated to the nearest full year for book purposes.

Linda had a number of questions for you on another client, so you completed your conversation over lunch. Before leaving, she reminded you that the MACRS depreciation schedules can be found on the IRS.gov website.

You planned to spend the afternoon reviewing Aguamaint's preliminary financial statements in detail and get questions to Jerry by Thursday. Jerry then would prepare responses so that you could begin the review on the following Monday.

REQUIRED:

The journal entries and financial statements prepared by Jerry Loos are attached. The crew truck cost schedule you recommended Jerry prepare is also included. You will find that it is not at all clear how Jerry calculated the numbers on the schedule.

Review the client?s data and prepare a list of additional information items needed from Jerry. Be sure to include any necessary questions to get the information needed to reconcile each truck schedule number, and to add any needed items. Be as specific as possible and phrase your requests in the form of questions as they normally would be asked of a client. Be sure to provide a written reason that you are asking each question and also provide a reference to the FASB codification where appropriate.

Jerry assured you that the bank account has been reconciled and that outstanding checks account for the only reconciling items. He also indicated that all vendor invoices reflecting business through December 31, 20X2 have been booked.

15. Have you considered temporary differences in your income tax calculations for the year? It appears you may have a few of these.

I really don?t understand taxes very well. I just multiplied our income by our 21% tax rate. I have no idea what you mean by temporary differences. What would cause those?

16. Are there any transactions or events that have occurred since year end 20X2 that we should disclose as subsequent events this year?

As a matter of fact, yes, there is one thing. We are implementing a retirement plan for all Aguamaint employees as of January 1, 20X3. I am very happy about this since it was not something I expected to happen.

What would the adjusting entries be for the temporary differences? I don't understand temporary differences very well.

And I don't know where to start on #16

Transcribed Image Text:

CURRENT ASSETS Cash Accounts receivable Supplies on hand Prepaid insurance Total Current Assets Total Long-Term Assets LONG-TERM ASSETS Equipment Accumulated depreciation equipment Vehicles Accumulated depreciation-vehicles NOL tax benefit NOL valuation allowance License TOTAL ASSETS LIABILITIES CURRENT LIABILITIES Accounts payable Wages payable Taxes payable LIABILITIES AND STOCKHOLDERS' EQUITY Total Current Liabilities AGUAMAINT, INC. BALANCE SHEET DECEMBER 31, 20X2 LONG TERM LIABILITIES Note payable STOCKHOLDERS' EQUITY Common stock Retained earnings ASSETS Total Stockholders' Equity TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 322,474 141,100 $ 20X2 $ 8,177 2,649 474,400 42,700 (12,200) 230,440 (34,667) 2,683 (939) 41,600 269,617 744,017 12,254 9,380 78,837 100,471 208,000 150,000 285,546 435,546 $ 744,017 AGUAMAINT, INC. STATEMENT OF INCOME FOR THE YEARS ENDING DECEMBER 31, Service revenue Cost of goods sold Gross profit Operating expenses Selling and administrative Depreciation and amortization Total operating expenses Operating income before income taxes Income tax expense Net income $ $ 20X2 1,330,500 633,279 697,221 277,840 43,967 321,807 375,414 (78,837) 296,577 J/E # 1 2 3 4 5 6 7 8 9 10 DATE 1/1/X2 2/1/X2 2/1/X2 ACCT# ACCOUNT NAME 563 602 101 101 401 181 101 101 105 505 101 105 560 305 101 305 181 561 101 305 AGUAMAINT, INC. JOURNAL ENTRIES DECEMBER 31, 20X2 181 562 601 101 SERVICE COSTS-INDIRECT-LEASE EXPENSE-SHOP BLDG SELLING & ADMIN-LEASE EXPENSE-OFFICE BLDG 181 563 CASH To record and allocate new building lease payment. CASH LONG-TERM DEBT-NOTES To record issuance of long-term notes payable. VEHICLES CASH To record purchase of two new trucks. CASH ACCOUNTS RECEIVABLE SERVICE REVENUE FROM CONTRACTS WITH CUSTOMERS To record revenue from maintenance contracts. CASH ACCOUNTS RECEIVABLE To record receipts on account. SERVICE COSTS-DIRECT-CREW WAGES WAGES PAYABLE CASH WAGES PAYABLE To record accrual and payment of crew wages. 181 VEHICLES 631 SELLING & ADMINISTRATIVE-OTHER 611 SELLING & ADMIN-OFFICERS SALARIES 612 SELLING & ADMIN-OTHER SALARIES 609 SELLING & ADMIN-PROFESSIONAL FEES 615 SELLING & ADMIN-PAYROLL AND OTHER TAXES SELLING & ADMIN-SUPPLIES DEBIT 32.500 6,500 208,000 VEHICLES SERVICE COSTS-INDIRECT-LEASE EXPENSE-SHOP BLDG To capitalize part of shop rent to trucks. 208,000 274,800 1,055,700 994,200 VEHICLES SERVICE COSTS-NDIRECT-SHOP WAGES CASH WAGES PAYABLE To record accrual and payment of shop wages, including wages capitalized to trucks. 347,010 15,050 7,200 147,000 607 101 CASH To record accrual and payment of S&A expenses, including salary capitalized to trucks. 975 7,250 129,025 52,000 5,820 58,695 16,000 VEHICLES SERVICE COSTS-INDIRECT-SHOP UTILITIES SELLING & ADMIN-UTILITIES CASH To record accrual and payment of utilities, including amount capitalized to trucks. 657 12,093 2,550 1,674 CREDIT 39,000 208,000 208,000 1,330,500 994,200 355,780 6,280 151,100 3,100 269,765 15.300 1,674 11 12 13 14 15 16 12/31/X2 17 12/31/X2 18 12/31/X2 19 12/31/X2 553 SERVICE COSTS-DIRECT-FUEL 101 CASH To record purchase and payment of truck fuel. 181 564 302 129 SUPPLIES ON HAND 564 SERVICE COSTS-INDIRECT-SUPPLIES To adjust to ending supplies inventory count. 552 101 302 101 704 172 710 197 VEHICLES SERVICE COSTS-INDIRECT-SUPPLIES ACCTS PAY-SUPPLIERS-OTHER COSTS To record purchase of supplies, and to capitalize parts used for truck modifications. 701 TRUCK DEPRECIATION 182 821 314 SERVICE COSTS-DIRECT-LEASE EXPENSE-TRUCKS CASH To record rent payment for maintenance trucks. ACCTS PAY-SUPPLIERS-OTHER COSTS CASH To record payment on account. VEHICLES-ACCUMULATED DEPRECIATION To record depreciation expense on trucks. EQUIPMENT DEPRECIATION EQUIPMENT-ACCUMULATED DEPRECIATION To record depreciation expense on shop equipment. AMORTIZATION OF LICENSING COSTS LICENSE To record amortization of licensing costs. INCOME TAX EXPENSE INCOME TAX PAYABLE To record income tax expense at statutory rate of 21%. 42,077 Totals 11,934 32,660 2,987 24,600 51,440 34,667 6,100 3,200 78,837 3,871,200 42,077 44,594 2,987 24,600 51,440 34,667 6,100 3,200 78,837 3,871,200 AGUAMAINT, INC. Crew Trucks Cost Schedule 20X2 Initial investment, Dealer 1 Additions: Shop crew labor Materials Planning and supervision Shop rent allocation Shop utilities allocation Crew Truck Cost $ 208,000 $ 7,200 11,934 975 1,674 657 230,440 CURRENT ASSETS Cash Accounts receivable Supplies on hand Prepaid insurance Total Current Assets Total Long-Term Assets LONG-TERM ASSETS Equipment Accumulated depreciation equipment Vehicles Accumulated depreciation-vehicles NOL tax benefit NOL valuation allowance License TOTAL ASSETS LIABILITIES CURRENT LIABILITIES Accounts payable Wages payable Taxes payable LIABILITIES AND STOCKHOLDERS' EQUITY Total Current Liabilities AGUAMAINT, INC. BALANCE SHEET DECEMBER 31, 20X2 LONG TERM LIABILITIES Note payable STOCKHOLDERS' EQUITY Common stock Retained earnings ASSETS Total Stockholders' Equity TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 322,474 141,100 $ 20X2 $ 8,177 2,649 474,400 42,700 (12,200) 230,440 (34,667) 2,683 (939) 41,600 269,617 744,017 12,254 9,380 78,837 100,471 208,000 150,000 285,546 435,546 $ 744,017 AGUAMAINT, INC. STATEMENT OF INCOME FOR THE YEARS ENDING DECEMBER 31, Service revenue Cost of goods sold Gross profit Operating expenses Selling and administrative Depreciation and amortization Total operating expenses Operating income before income taxes Income tax expense Net income $ $ 20X2 1,330,500 633,279 697,221 277,840 43,967 321,807 375,414 (78,837) 296,577 J/E # 1 2 3 4 5 6 7 8 9 10 DATE 1/1/X2 2/1/X2 2/1/X2 ACCT# ACCOUNT NAME 563 602 101 101 401 181 101 101 105 505 101 105 560 305 101 305 181 561 101 305 AGUAMAINT, INC. JOURNAL ENTRIES DECEMBER 31, 20X2 181 562 601 101 SERVICE COSTS-INDIRECT-LEASE EXPENSE-SHOP BLDG SELLING & ADMIN-LEASE EXPENSE-OFFICE BLDG 181 563 CASH To record and allocate new building lease payment. CASH LONG-TERM DEBT-NOTES To record issuance of long-term notes payable. VEHICLES CASH To record purchase of two new trucks. CASH ACCOUNTS RECEIVABLE SERVICE REVENUE FROM CONTRACTS WITH CUSTOMERS To record revenue from maintenance contracts. CASH ACCOUNTS RECEIVABLE To record receipts on account. SERVICE COSTS-DIRECT-CREW WAGES WAGES PAYABLE CASH WAGES PAYABLE To record accrual and payment of crew wages. 181 VEHICLES 631 SELLING & ADMINISTRATIVE-OTHER 611 SELLING & ADMIN-OFFICERS SALARIES 612 SELLING & ADMIN-OTHER SALARIES 609 SELLING & ADMIN-PROFESSIONAL FEES 615 SELLING & ADMIN-PAYROLL AND OTHER TAXES SELLING & ADMIN-SUPPLIES DEBIT 32.500 6,500 208,000 VEHICLES SERVICE COSTS-INDIRECT-LEASE EXPENSE-SHOP BLDG To capitalize part of shop rent to trucks. 208,000 274,800 1,055,700 994,200 VEHICLES SERVICE COSTS-NDIRECT-SHOP WAGES CASH WAGES PAYABLE To record accrual and payment of shop wages, including wages capitalized to trucks. 347,010 15,050 7,200 147,000 607 101 CASH To record accrual and payment of S&A expenses, including salary capitalized to trucks. 975 7,250 129,025 52,000 5,820 58,695 16,000 VEHICLES SERVICE COSTS-INDIRECT-SHOP UTILITIES SELLING & ADMIN-UTILITIES CASH To record accrual and payment of utilities, including amount capitalized to trucks. 657 12,093 2,550 1,674 CREDIT 39,000 208,000 208,000 1,330,500 994,200 355,780 6,280 151,100 3,100 269,765 15.300 1,674 11 12 13 14 15 16 12/31/X2 17 12/31/X2 18 12/31/X2 19 12/31/X2 553 SERVICE COSTS-DIRECT-FUEL 101 CASH To record purchase and payment of truck fuel. 181 564 302 129 SUPPLIES ON HAND 564 SERVICE COSTS-INDIRECT-SUPPLIES To adjust to ending supplies inventory count. 552 101 302 101 704 172 710 197 VEHICLES SERVICE COSTS-INDIRECT-SUPPLIES ACCTS PAY-SUPPLIERS-OTHER COSTS To record purchase of supplies, and to capitalize parts used for truck modifications. 701 TRUCK DEPRECIATION 182 821 314 SERVICE COSTS-DIRECT-LEASE EXPENSE-TRUCKS CASH To record rent payment for maintenance trucks. ACCTS PAY-SUPPLIERS-OTHER COSTS CASH To record payment on account. VEHICLES-ACCUMULATED DEPRECIATION To record depreciation expense on trucks. EQUIPMENT DEPRECIATION EQUIPMENT-ACCUMULATED DEPRECIATION To record depreciation expense on shop equipment. AMORTIZATION OF LICENSING COSTS LICENSE To record amortization of licensing costs. INCOME TAX EXPENSE INCOME TAX PAYABLE To record income tax expense at statutory rate of 21%. 42,077 Totals 11,934 32,660 2,987 24,600 51,440 34,667 6,100 3,200 78,837 3,871,200 42,077 44,594 2,987 24,600 51,440 34,667 6,100 3,200 78,837 3,871,200 AGUAMAINT, INC. Crew Trucks Cost Schedule 20X2 Initial investment, Dealer 1 Additions: Shop crew labor Materials Planning and supervision Shop rent allocation Shop utilities allocation Crew Truck Cost $ 208,000 $ 7,200 11,934 975 1,674 657 230,440

Answer rating: 100% (QA)

Solution 1 Temporary Difference This is considered in calculation of Deferred Tax in which we identi... View the full answer