Your firm has been engaged to examine the financial statements of Buffalo Corporation for the year 2020. The bookkeeper who maintains the financial records has prepared all the unaudited financial statements for the corporation since its organization on January 2, 2015. The client provides you with the information. Buffalo Corporation Balance Sheet December 31, 2020 Assets   Liabilities Current assets   $1,899,000   Current liabilities   $956,000 Other assets   5,138,660   Long-term liabilities   1,471,000         Stockholders’ equity   4,610,660     $7,037,660       $7,037,660   An analysis of current assets discloses the following.       Cash (restricted in the amount of $298,000 for plant expansion)   $582,000   Investments in land   187,000   Accounts receivable less allowance of $30,000   487,000   Inventories (LIFO flow assumption)   643,000     $1,899,000       Other assets include:       Prepaid expenses   $62,000   Plant and equipment less accumulated depreciation of $1,412,000   4,110,000   Cash surrender value of life insurance policy   83,000   Unamortized bond discount   36,660   Notes receivable (short-term)   161,000   Goodwill   247,000   Land   439,000     $5,138,660       Current liabilities include:       Accounts payable   $503,000   Notes payable (due 2023)   158,000   Estimated income taxes payable   145,000   Premium on common stock   150,000     $956,000       Long-term liabilities include:       Unearned revenue   $493,000   Dividends payable (cash)   198,000   8% bonds payable (due May 1, 2025)   780,000     $1,471,000       Stockholders’ equity includes:       Retained earnings   $2,790,660   Common stock, par value $10; authorized 200,000 shares, 182,000 shares issued   1,820,000     $4,610,660 The supplementary information below is also provided. 1.   On May 1, 2020, the corporation issued at 95.30, $780,000 of bonds to finance plant expansion. The long-term bond agreement provided for the annual payment of interest every May 1. The existing plant was pledged as security for the loan. Use the straight-line method for discount amortization. 2.   The bookkeeper made the following mistakes.     a. In 2018, the ending inventory was overstated by $185,000. The ending inventories for 2019 and 2020 were correctly computed.     b. In 2020, accrued wages in the amount of $222,000 were omitted from the balance sheet, and these expenses were not charged on the income statement.     c. In 2020, a gain of $175,000 (net of tax) on the sale of certain plant assets was credited directly to retained earnings. 3.   A major competitor has introduced a line of products that will compete directly with Buffalo’s primary line, now being produced in a specially designed new plant. Because of manufacturing innovations, the competitor’s line will be of comparable quality but priced 50% below Buffalo’s line. The competitor announced its new line on January 14, 2021. Buffalo indicates that the company will meet the lower prices that are high enough to cover variable manufacturing and selling expenses, but permit recovery of only a portion of fixed costs. 4.   You learned on January 28, 2021, prior to completion of the audit, of heavy damage because of a recent fire to one of Buffalo’s two plants; the loss will not be reimbursed by insurance. The newspapers described the event in detail. Analyze the above information to prepare a corrected balance sheet for Buffalo in accordance with proper accounting and reporting principles. Prepare a description of any notes that might need to be prepared. The books are closed and adjustments to income are to be made through retained earnings. (List Current Assets in order of liquidity.)

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Chapter1: Financial Statements And Business Decisions
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Your firm has been engaged to examine the financial statements of Buffalo Corporation for the year 2020. The bookkeeper who maintains the financial records has prepared all the unaudited financial statements for the corporation since its organization on January 2, 2015. The client provides you with the information.

Buffalo Corporation
Balance Sheet
December 31, 2020
Assets
 
Liabilities
Current assets
  $1,899,000  
Current liabilities
  $956,000
Other assets
  5,138,660  
Long-term liabilities
  1,471,000
       
Stockholders’ equity
  4,610,660
    $7,037,660       $7,037,660

 

An analysis of current assets discloses the following.    
  Cash (restricted in the amount of $298,000 for plant expansion)   $582,000
  Investments in land   187,000
  Accounts receivable less allowance of $30,000   487,000
  Inventories (LIFO flow assumption)   643,000
    $1,899,000
     
Other assets include:    
  Prepaid expenses   $62,000
  Plant and equipment less accumulated depreciation of $1,412,000   4,110,000
  Cash surrender value of life insurance policy   83,000
  Unamortized bond discount   36,660
  Notes receivable (short-term)   161,000
  Goodwill   247,000
  Land   439,000
    $5,138,660
     
Current liabilities include:    
  Accounts payable   $503,000
  Notes payable (due 2023)   158,000
  Estimated income taxes payable   145,000
  Premium on common stock   150,000
    $956,000
     
Long-term liabilities include:    
  Unearned revenue   $493,000
  Dividends payable (cash)   198,000
  8% bonds payable (due May 1, 2025)   780,000
    $1,471,000
     
Stockholders’ equity includes:    
  Retained earnings   $2,790,660
  Common stock, par value $10; authorized 200,000 shares, 182,000 shares issued   1,820,000
    $4,610,660


The supplementary information below is also provided.

1.   On May 1, 2020, the corporation issued at 95.30, $780,000 of bonds to finance plant expansion. The long-term bond agreement provided for the annual payment of interest every May 1. The existing plant was pledged as security for the loan. Use the straight-line method for discount amortization.
2.   The bookkeeper made the following mistakes.
    a. In 2018, the ending inventory was overstated by $185,000. The ending inventories for 2019 and 2020 were correctly computed.
    b. In 2020, accrued wages in the amount of $222,000 were omitted from the balance sheet, and these expenses were not charged on the income statement.
    c. In 2020, a gain of $175,000 (net of tax) on the sale of certain plant assets was credited directly to retained earnings.
3.   A major competitor has introduced a line of products that will compete directly with Buffalo’s primary line, now being produced in a specially designed new plant. Because of manufacturing innovations, the competitor’s line will be of comparable quality but priced 50% below Buffalo’s line. The competitor announced its new line on January 14, 2021. Buffalo indicates that the company will meet the lower prices that are high enough to cover variable manufacturing and selling expenses, but permit recovery of only a portion of fixed costs.
4.   You learned on January 28, 2021, prior to completion of the audit, of heavy damage because of a recent fire to one of Buffalo’s two plants; the loss will not be reimbursed by insurance. The newspapers described the event in detail.


Analyze the above information to prepare a corrected balance sheet for Buffalo in accordance with proper accounting and reporting principles. Prepare a description of any notes that might need to be prepared. The books are closed and adjustments to income are to be made through retained earnings. (List Current Assets in order of liquidity.)

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