problem: You recently joined internal auditing department of Kay Sportswear Corporation. As one of your 1st assignments, you are examining a balance sheet created by a staff accountant.
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Kay Sportswear Corporation
Balance Sheet
At December 31, 2009
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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 shareholder's equity
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$4,346,000
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In the course of your examination you uncover the following data pertaining to the balance sheet:
[A] Land and buildings represent the corporate headquarters & manufacturing facilities.
[B] The note receivable is due in 2011. The balance of dollar 80,000 includes dollar 5,000 of accrued interest. The next interest payment is due in July, 2010.
[C] The note payable is due in installments of $50,000 per year. Interest on both the notes and bonds is payable yearly.
[D] The firm's investments consist of marketable equity securities of other corporations. Management does not intend to liquidate any investments in the coming year.
[E] Unearned revenue will be received ratably [equally] over the next two (2) years.
Required;
Identify and describe deficiencies in the balance sheet prepared by the firm's accountant. Include in your answer items that require additional disclosure, either on the face of the statement or in a note.