12-57      LO 8 Describe the basic approach to auditing leases.

12-58      LO 8 You are performing the year-end audit of Halvorson Fine Foods, Inc. for December 31, 2014. The client has prepared the following schedule for the fixed assets and related allowance for depreciation accounts.

 

 

 

 

 

 

Halvorson Fine Foods, Inc. Analysis of Fixed Assets

For the Year Ended December 31, 2014

 

 

 

Description

 

Final Balance,

December 31, 2013                    Additions                    Retirements

 

Per Books, December 31, 2014

 

 

Assets:

 

Land	$22,500	Â	$5,000	Â	Â	Â	$27,500
Buildings	120,000	Â	17,500	Â	Â	Â	137,500
Machinery and equipment	385,000	Â	40,400	Â	$26,000	Â	399,400
Â	 $527,500	Â	 $62,900	Â	 $26,000	Â	 $564,400
Allowance for depreciation:	Â	Â	Â	Â	Â	Â	Â
Building	$60,000	Â	$5,150	Â	Â	Â	$65,150
Machinery and equipment	173,200	Â	39,220	Â	Â	Â	212,470
Â	 $233,250	Â	 $44,370	Â	Â	Â	 $277,620

 

 

You have compared the opening balances with your prior-year audit working papers. The following information (labeled as 1. through 6. below) is found during your audit. Review this informa- tion  and do  the following:

a.       In addition to inquiring of the client, explain how you found each of the described items of information (labeled as 1. through 6. below) during the audit.

b.       Prepare the adjusting journal entries (if necessary) with sup- porting computations that you would suggest at December 31, 2014, to adjust the accounts for the listed transactions. Disre- gard income tax implications.

1.       All equipment is depreciated on a straight-line basis (no salvage value taken into consideration) based on the following esti- mated lives: buildings, 25 years; all other items, 10 years. The company’s policy is to take one-half year’s depreciation on all asset acquisitions and disposals occurring during the year.

2.       On April 1 of the current year, the company entered into a 10-year lease contract for a die-casting machine with annual rentals of

$5,000, payable in advance every April 1. The lease is cancelable by either party (60 days’ written notice is required), and there is no option to renew the lease or buy the equipment at the end of the lease. The estimated useful life of the machine is 10 years with no salvage value. The company recorded the die-casting machine in the machinery and equipment account at $40,400, the present value at the date of the lease, and $2,020, applicable to the machine, has been included in depreciation expense for the year.

3.       The company completed the construction of a wing on    the plant building on June 30 of the current year. The useful life of the building was not extended by this addition. The lowest construction bid received was $17,500, the amount recorded in the buildings account. Company personnel were used to con- struct the addition at a cost of $16,000 (materials, $7,500; labor, $5,500; and overhead, $3,000).

4.       On August 18, Halvorson paid $5,000 for paving and fencing a portion of land owned by the company for use as a parking lot for employees. The expenditure was charged to the land account.

 

 

 

 

 

5.       The amount shown in the retirements column for the machin- ery and equipment asset represents cash received on September 5, on disposal of a machine purchased in July 2000 for

$48,000. The bookkeeper recorded a depreciation expense   of

$3,500 on  this  machine in 2012.

6.       Crux City donated land and building appraised at $10,000 and

$40,000, respectively, to Halvorson for a plant. On September 1, the company began operating the plant. Because no costs were involved, the bookkeeper made no entry for the foregoing transaction.