Warning: foreach() argument must be of type array|object, bool given in /var/www/html/web/app/themes/studypress-core-theme/template-parts/header/mobile-offcanvas.php on line 20

Chapter 24: Question 2CA-1 (page 1453)

(Disclosures Required in Various Situations) Ace Inc. produces electronic components for sale to manufacturers of radios, television sets, and digital sound systems. In connection with her examination of Ace’s financial statements for the year ended December 31, 2018, Gloria Rodd, CPA, completed field work 2 weeks ago. Ms. Rodd now is evaluating the significance of the following items prior to preparing her auditor’s report. Except as noted, none of these items have been disclosed in the financial statements or notes.

Item 1: A 10-year loan agreement, which the company entered into 3 years ago, provides that dividend payments may not exceed net income earned after taxes subsequent to the date of the agreement. The balance of retained earnings at the date of the loan agreement was \(420,000. From that date through December 31, 2018, net income after taxes has totaled \)570,000 and cash dividends have totaled $320,000. On the basis of these data, the staff auditor assigned to this review concluded that there was no retained earnings restriction at December 31, 2018.

Instructions

For each of the above items, discuss any additional disclosures in the financial statements and notes that the auditor should recommend to her client. (The cumulative effect of the four items should not be considered.)

Short Answer

Expert verified

Retained earnings are restricted to the amount of $420,000.

Step by step solution

01

Meaning of Financial Statements

Financial statements are reports generated by a company's management to demonstrate the company's financial performanceand position at a certain moment in time. A balance sheet, income statements, statement of owner's equity, and statement of cash flows are usually included in a general-purpose collection of financial statements.

02

Additional disclosure in the financial statements

The provisions of the loan agreement were misinterpreted by the employee auditor evaluating it. Retained profit is limited to the amount of $420,000, which was the remainder of retained earnings at the time of settlement. The nature and amount of the limit should be mentioned in the balance sheet or financial statement note.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

Carlton Company is involved in four separate industries. The following information is available for each of the four industries.

Operating Segment
Total Revenue
Operating Profit (Loss)
Identifiable Assets
W
\( 60,000
15,000
\)167,000
X
10,000
3,000
83,000
Y
23,000
(2,000)
21,000
Z
9,000
1,000
19,000

\(102,000
\)17,000
$290,000

Instructions

Determine which of the operating segments are reportable based on the:

c) Identifiable assets test.

Interim reporting under IFRS:

(a) is prepared using the discrete approach.

(b) is prepared using a combination of the discrete and integral approach.

(c) requires a complete set of financial statements for each interim period.

(d) permits companies to omit disclosure of material events subsequent to the interim reporting date.

Differential reporting for small- and medium-sized entities:

a) is required for all companies less than a certain size.

b) omits accounting topics not relevant for SMEs, such as earnings per share, and interim and segment reporting.

c) has different rules for topics such as earnings per share, and interim and segment reporting.

d) requires significantly more disclosures, since more items are not recognized in the financial statements.

Answer each of the questions in the following unrelated situations.

c) A company has current assets of \(90,000 (of which \)40,000 is inventory and prepaid items) and current liabilities of \(40,000. What is the current ratio? What is the acid-test ratio? If the company borrows \)15,000 cash from a bank on a 120-day loan, what will its current ratio be? What will the acid-test ratio be?

What are diversified companies? What accounting problems are related to diversified companies?

See all solutions

Recommended explanations on Business Studies Textbooks

View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free