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Case 2.

Auditing the Acquisition and Payment Cycle

You are doing the audit of the UTE Corporation, for the year ended December 31, 2009. The following schedule for
the property, plant, and equipment and related allowance for depreciation accounts 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, 2009

Final Per Books


Description Additions Retirements
12/31/08 12/31/09
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
Machinery and Equipment 1,732,500 392,200 2,124,700
$2,332,500 $443,700 $2,776,200

The following information is found during your audit:

1. All equipment is depreciated on the straight-line basis (no salvage value taken into consideration) based on
the following estimated lives: building, 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.
2. 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 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 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 years.
3. 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 buildings account. Company personnel were used to construct the addition at a cost of
$160,000 (materials, $75,000; labor, $55,000; and overhead, $30,000).
4. 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.
5. The amount shown in the machinery and equipment asset retirement column represents cash received on
September 5, upon disposal of a machine acquired in July 2005 for $480,000. The bookkeeper recorded
depreciation expense of $35,000 of this machine in 2007.
6. 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:

a. In addition to inquiry of the client, explain how you would have found each of these six items during the
audit.
b. Prepare adjusting journal entries with supporting computations that you would suggest at December 31,
2009, to adjust the accounts for the preceding transactions. Disregard income tax implications.