Problem 13-32 Page 460 UTE Corporation Your are doing the audit of UTE Corporation for the year ended December 31, 2016. The following schedule fore the property, plant, and equipment and related allowance for depreciation has been prepared by the client. You have compared the opening balances with your prior year’s audit documentation. UTE Corporation Analysis of Property, Plant, and Equipment and Related Allowance for Depreciation Accounts Year Ended December 31, 2015 Description Final 12/31/14 Additions Retirements Per Books 12/31/15 Assets Land $ 225,000 $ 50,000 $ 275,000 Buildings 1,200,000 175,000 1,375,000 Machinery and Equipment 3,850,000 404,000 260,000 3,994,000 $5,275,000 $629,000 $ 260,000 $5,644,000 Allowance for Depreciation Building $ 600,000 $ 51,500 $ 651,500 1,732,500 392,200 2,124,700 $2,332,500 $443,700 $2,776,200
The following information is found during your audit: All equipment is deprecated on the straight-line basis (no salvage value is taken into consideration) based on the following estimated lives: buildings, 25 years; all other items , 10 years. The corporation’s policy is to take one-half year’s depreciation on all asset acquisitions and disposals during the year. On April 1, the corporation entered into a 10-year lease contract for a die-casting machine with annual rentals of $50,000, payable in advance every April 1. The lease is cancellable 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 corporation recorded the die-casting machine in the machinery and equipment account at $404,000, the present value at the date of the lease, and $20,200, applicable to the machine, has been included in depreciation expense for the year. The corporation completed the construction of a wing on the plant building on June 30. The useful life of the building was not extended by this addition. The lowest construction bid received was $175,000, the amount recorded in the building account. Company personnel were use to construct the addition at a cost of $160,000 (materials, $75,000; labour $55,000; and overhead, $30,000). On August 18, $50,000 was paid for paving and fencing a portion of land owned by the corporation and used as a parking lot for employees. The expenditure was charged to the land account. The amount shown in the machinery and equipment asset retirement column represents cash received on September 5, upon disposal of a machine acquire in July 2012 for $480,000. The bookkeeper recorded depreciation expense of $35,000 on this machine in 2015. Crux City donated land and building appraised at $100,000 and $400,000 respectively, to the UTE Corporation for a plant. On September 1, the corporation began operating the plant. Because no costs were involved, the bookkeeper made no entry for the foregoing transaction. REQUIRED In addition to inquiry of the client, explain how you would have found each of these six items during the audit.
Solution to Problem 13-32 Items 1 through 6 would have been found in the following way: The company’s policies for depreciating equipment are available from several sources: The prior year’s audit schedules and permanent file. Footnote disclosure in the annual report and SEC Form 10-K. Company procedures manuals. Detailed fixed asset records. The ten-year lease contract would be found when supporting data for current year’s equipment additions were examined. Also, it may be found by a review of company lease files, contract files, or minutes of meetings of the board of directors. The calculations would likely be shown on a supporting schedule and can be traced to the general journal. The building wing addition would be apparent by the addition to buildings during the year. The use of the low construction bid amount would be found when support for the addition was examined. When it was determined that this inappropriate method was followed, the actual costs could be determined by reference to construction work orders and supporting data. The wing could also be examined. The paving and fencing could be discovered when support was examined for the addition to land.
The details of the retirement transactions could be determined by examining the sales agreement, cash receipts documentation, and related detailed fixed asset record. This examination would be instigated by the recording of the retirement in the machinery account or the review of cash receipts records. The auditor would become apprised of a new plant in several ways: Volume would increase. Account details such as cash, inventory, prepaid expenses, and payroll would be attributed to the new location. The transaction may be indicated in documents such as the minutes of the board, press releases, and reports to stockholders. Property tax and insurance bills examined show the new plant. One or more of these occurrences should lead the auditor to investigate the reasons and circumstances involved. Documents from the city and appraisals could be examined to determine the details involved.