Reference no: EM13948525
As a recently appointed auditor for Gibbs Manufacturing Co., the Manager of the audit, asked you to examine selected accounts before issue the financial statement of 12/31/10, to be audited. Gibbs Manufacturing Co. was incorporated on 1/2/10 but was unable to begin manufacturing activities until 8/1/10 because new factory facilities were not completed until that date. The Land and Building accounts at 12/31/14 per books were as follows:
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Date
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Item
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Amount
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1/31/2010
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Land and dilapidated building
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$200,000
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2/28/2010
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Cost of removing building
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4,000
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4/1/2010
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Legal fees
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6,000
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5/1/2010
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Fire insurance premium payment
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5,400
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5/1/2010
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Special tax assessment for streets
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4,500
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5/1/2010
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Partial payment of new building construction
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170,000
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8/1/2010
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Final payment on building construction
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170,000
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8/1/2010
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General expenses
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30,000
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12/31/2010
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Asset write-up
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75,000
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Total
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$624,900
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Additional information:
1. To acquire the land and building on 1/31/10, the company paid $100,000 cash and 1,000 shares of its common stock (par value = $100/share) which is very actively traded and had a market value per share of $140.
2. When the old building was removed, Gibbs paid Kwik Demolition Co. $4,000 but also received $1,500 from the sale of salvaged material.
3. Legal fees covered the following:
Cost of organization $2,500
Examination of title covering purchase of land 2,000
Legal work in connection with the building construction 1,500
Total $6,000
4. The fire insurance premium covered premiums for a three-year term beginning May 1, 2010.
5. General expenses covered the following for the period 1/2/10 to 8/1/10.
President's salary $20,000
Plant superintendent covering supervision of new building 10,000
Total $30,000
6. Because of the rising land costs, the president was sure that the land was worth at least $75,000 more than what it cost the company.
7. The straight method is used to depreciation fixed assets. The useful life of a building is 40 years, with a residual value of $20,000.
Based on the preliminary review, the manager lists the issues to be solved before the meeting with the management of Gibbs Manufacturing:
1. Prepare a brief explanation of each management assertion related to misstatement for the period under audit.
2. Determine the proper balances as of 12/31/10, and prepare an analysis and present recommendation for each of the situations above.
3. Prepare a draft of the correct presentation in the financial statements as of 12/31/10.
4. Mention the audit objectives that are directly related with the management assertions that are affected.
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