Question: Stoscheck Moving Corporation has been in operation
Stoscheck Moving Corporation has been in operation since January 1, 2017. It is now December 31, 2017, 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 2017 annual financial statements were prepared by a clerk and then were given to the bank.
Stoscheck Moving Corporation
Balance Sheet
At December 31, 2017
Assets
Cash……………………………………………………... $ 2,000
Receivables………………………………………………..3,000
Supplies…………………………………………………….4,000
Equipment………………………………………………40,000
Prepaid insurance……………………………………..6,000
Remaining assets…………………………………….27,000
Total assets……………………………………………$82,000
Liabilities
Accounts payable……………………………………$ 9,000
Stockholders’ Equity
Common stock (10,000 shares outstanding) 35,000
Retained earnings ……………………………………38,000
Total liabilities and stockholders’ equity …..$82,000
Stoscheck Moving Corporation
Income Statement
For the Period Ended December 31, 2017
Transportation revenue ……………………………. $85,000
Expenses:
Salaries expense ……………………………….………. 17,000
Supplies expense…………………………………………. 12,000
Other expenses……………………………………………. 18,000
Total expenses……………………………………………..47,000
Net income………………………………………………..$38,000
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 2017. A count of the supplies on hand on December 31, 2017, showed $1,800 worth of supplies remaining.
b. The insurance premium paid in 2017 was for years 2017 and 2018. The total insurance premium was debited in full to Prepaid Insurance when paid in 2017 and no adjustment has been made.
c. The equipment cost $40,000 when purchased January 1, 2017. It had an estimated annual depreciation of $8,000. No depreciation has been recorded for 2017.
d. Unpaid (and unrecorded) salaries at December 31, 2017, amounted to $3,200.
e. At December 31, 2017, 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 2017.
f. The income tax rate is 35 percent.
Required:
1. Record the six adjusting entries required on December 31, 2017, 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 the unadjusted and adjusted balances, calculate these ratios for the company: (a) earnings per share (rounded to two decimal places) and (b) total asset turnover (rounded to three decimal places). 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 the loan.
Transcribed Image Text:
CHANGES Amounts Corrected Items Reported Debit Credit Amounts (List here each item from the two statements)
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