Question

Your firm has been engaged to examine the financial statements of Cheyenne Corporation for the year 2017. The bookkeeper who maintains the financial records has prepared all the unaudited financial statements for the corporation since its organization on January 2, 2012. The client provides you with the information below.

CHEYENNE CORPORATION BALANCE SHEET DECEMBER 31, 2017
Assets				Liabilities
Current assets		$1,880,000		Current liabilities		$971,000
Other assets		5,131,000		Long-term liabilities		1,444,000
				Capital		4,596,000
		$7,011,000				$7,011,000

An analysis of current assets discloses the following.
Cash (restricted in the amount of $299,000 for plant expansion)		$580,000
Investments in land		184,000
Accounts receivable less allowance of $31,000		472,000
Inventories (LIFO flow assumption)		644,000
		$1,880,000
Other assets include:
Prepaid expenses		$64,000
Plant and equipment less accumulated depreciation of $1,410,000		4,059,000
Cash surrender value of life insurance policy		82,000
Unamortized bond discount		60,000
Notes receivable (short-term)		160,000
Goodwill		257,000
Land		449,000
		$5,131,000
Current liabilities include:
Accounts payable		$515,000
Notes payable (due 2020)		160,000
Estimated income taxes payable		143,000
Premium on common stock		153,000
		$971,000
Long-term liabilities include:
Unearned revenue		$497,000
Dividends payable (cash)		197,000
8% bonds payable (due May 1, 2022)		750,000
		$1,444,000
Capital includes:
Retained earnings		$2,736,000
Common stock, par value $10; authorized 200,000 shares, 186,000 shares issued		1,860,000
		$4,596,000

The supplementary information below is also provided.

1.		On May 1, 2017, the corporation issued at 92.00, $750,000 of bonds to finance plant expansion. The long-term bond agreement provided for the annual payment of interest every May 1. The existing plant was pledged as security for the loan. Use the straight-line method for discount amortization.
2.		The bookkeeper made the following mistakes.
		(a)	In 2015, the ending inventory was overstated by $187,000. The ending inventories for 2016 and 2017 were correctly computed.
		(b)	In 2017, accrued wages in the amount of $223,000 were omitted from the balance sheet, and these expenses were not charged on the income statement.
		(c)	In 2017, a gain of $175,000 (net of tax) on the sale of certain plant assets was credited directly to retained earnings.
3.		A major competitor has introduced a line of products that will compete directly with Cheyenne’s primary line, now being produced in a specially designed new plant. Because of manufacturing innovations, the competitor’s line will be of comparable quality but priced 50% below Cheyenne’s line. The competitor announced its new line on January 14, 2018. Cheyenne indicates that the company will meet the lower prices that are high enough to cover variable manufacturing and selling expenses, but permit recovery of only a portion of fixed costs.
4.		You learned on January 28, 2018, prior to completion of the audit, of heavy damage because of a recent fire to one of Cheyenne’s two plants; the loss will not be reimbursed by insurance. The newspapers described the event in detail.

Analyze the above information to prepare a corrected balance sheet for Cheyenne in accordance with proper accounting and reporting principles. Prepare a description of any notes that might need to be prepared. The books are closed and adjustments to income are to be made through retained earnings.

Answer 1