Swap CollateralHydromaint Inc. was created in 20x1. Your firm has been working with them since their inception by providing review services each year, as required by their bank. These services have included reviewing the journal entries prepared by the client each year, and making inquiries to the client to understand the methodologies and estimates used. Your firm then proposes adjusting entries to bring the financial statements into compliance with GAAP, and prepared the financial statement footnotes. When Hydromaint was created they were exclusively providing hydraulic maintenance services. As they have grown they began to carry parts in inventory to expedite their maintenance and repair activities. (Previously they would order parts only when needed.) In 20x4 Hydromaint acquired a 20 percent ownership in PVCO, a supplier of high quality pumps and valves. At that time one of the Hydromaint founders was placed on the board of PVCO. You have been provided the journal entries for 20x5, and the income statement and balance sheet that was prepared by the client. (Some of the entries are aggregated for simplicity.) Review the financial information provided, and prepare adjusting entries and financial statements.

			Trial					Adjusted
		12/31/X4	12/31/X5					12/31/X5
Acct No	Account Title	DR(CR)	DR(CR)	ref	Dr	ref	Cr	DR(CR)
101	Cash	248,490	92,406					92,406
105	Accounts Receivable	146,000	209,200					209,200
106	Accounts Receivable- Prog Billings							-
108	Allowance for Bad Debt	(30,000)	(40,200)					(40,200)
111	Equity Securities	25,075	46,400					46,400
121	Merchandise Inventory	116,790	166,490					166,490
122	Work In Progress							-
123	Manufacturing Costs- Variable							-
124	Manufacturing Costs- Fixed							-
125	Raw Materials							-
126	Construction Work In Progress							-
127	Construction WIP- Progress Billings							-
129	Supplies on Hand	20,921	21,921					21,921
141	Deferred Income Tax Asset - Current	48,278	48,278					48,278
142	NOL Tax Benefit							-
143	NOL Valuation Allowance							-
151	Land		105,000					105,000
161	Buildings		215,000					215,000
162	Buildings - Accumulated Depreciation		(10,750)					(10,750)
171	Equipment	30,000	90,000					90,000
172	Equipment- Accumulated Depreciation	(24,000)	(40,000)					(40,000)
181	Vehicles	392,286	392,286					392,286
182	Vehicles - Accumulated Depreciation	(148,143)	(196,972)					(196,972)
191	Leased Assets	380,000	380,000					380,000
192	Leased Assets- Accumulated Depreciation	(38,000)	(57,000)					(57,000)
201	Equity Securities - Long Term		368,474					368,474
202	Equity Securities - Equity Interest	368,474	1,750,000					1,750,000
211	Licensing Costs, NET	6,000	-					-
212	Goodwill							-
215	Deferred Income Tax Asset - Long Term							-
217	Start-Up Costs							-
221	Deferred R&D Costs							-
301	Accounts Payable- Inventoriable Costs	(16,790)	(97,690)					(97,690)
302	Accounts Payable- Suppliers - Other Costs	(29,000)	(38,000)					(38,000)
303	Accounts Payable- Equipment ACQ		-					-
311	Interest Payable	(42,824)	(35,557)					(35,557)
312	Income Tax Payable	(80,095)	(97,142)					(97,142)
321	Short-Term Portion of Long Term Debt	(69,363)	(77,556)					(77,556)
325	Deferred Income Tax Liability - Current							-
331	Notes Payable							-
335	Unearned Revenue	(124,000)	(124,000)					(124,000)
338	Accrued Pension Liability	(42,276)	(13,737)					(13,737)
401	Long-Term Debt Notes	(147,684)	(78,022)					(78,022)
402	Long-Term Debt Bonds							-
411	Net Pension Liability - Long-term	(159,034)	(139,155)					(139,155)
415	Capital Leases- Liability	(325,332)	(317,438)					(317,438)
421	Deferred Income Tax Liability - Long Term	(16,913)	(16,913)					(16,913)
422	Estimated Liability- Product Warranties							-
451	Capital Stock- Common	(120,000)	(120,000)					(120,000)
452	Paid-in Capital Common							-
461	Capital Stock- Preferred		(700,000)					(700,000)
462	Paid-in Capital Preferred		(875,000)					(875,000)
471	OCI- Market Gain- ST Equity Securities							-
475	OCI- Deferred Pension Cost - Past Service Cost	159,034	139,155					139,155
476	OCI-Deferred (Gain) Loss							-
491	Retained Earnings	(268,622)	(527,894)					(527,894)
492	Retained Earnings- Cash Dividends		92,000					92,000
493	Retained Earnings- Stock Dividends							-
494	Retained Earnings- Error Correction PY							-
495	Retained Earnings- Cumulative Effect							-
501	Sales Revenue	(135,000)	(1,360,000)					(1,360,000)
505	Service Revenue	(2,300,000)	(2,850,000)					(2,850,000)
511	Construction Revenue							-
521	Cost of Goods Sold	100,000	850,000					850,000
522	Air Freight		80,400					80,400
523	Warehouse Rent		12,000					12,000
551	Service Costs- Direct- Crew Wages	897,000	1,148,550					1,148,550
552	Service Costs- Direct- Truck Rental	-	26,000					26,000
553	Service Costs- Direct- Fuel	39,000	47,000					47,000
554	Service Costs- R and M	9,000	12,500					12,500
561	Service Costs- Indirect Shop Wages	141,000	138,975					138,975
562	Service Costs- Indirect Shop Utilities	37,500	40,833					40,833
563	Service Costs- Indirect Shop Rent	-	-					-
564	Service Costs- Indirect Supplies	53,000	60,000					60,000
565	Service Costs- Crew Training	-	-					-
581	Costs of Construction Revenue Earned	-	-					-
601	Selling & Admin- Utilities	7,500	8,167					8,167
602	Selling & Admin- Building Rental		-					-
603	Selling & Admin- Medical Benefits	83,460	115,815					115,815
604	Selling & Admin- Pension Expense	224,700	331,461					331,461
605	Selling & Admin- Officers Salaries	115,000	140,000					140,000
606	Selling & Admin- Rent Equipment	5,000	8,000					8,000
607	Selling & Admin- Supplies	7,000	15,000					15,000
608	Selling & Admin- Other Salaries	98,000	116,000					116,000
609	Selling & Admin- Professional Fees	10,000	9,000					9,000
615	Selling & Admin- Other	18,000	31,000					31,000
631	Selling & Admin- Sales Sal & Comm		142,400					142,400
632	Selling & Admin- Warehouse Wages		55,000					55,000
651	Selling & Admin- Bad Debts	62,000	35,000					35,000
701	Service Costs- Direct- Truck Depreciation	66,381	48,829					48,829
704	Service Costs Indirect Depreciation Shop Equip	6,000	16,000					16,000
706	Selling & Admin- Warehouse Depreciation	-	10,750					10,750
710	Amortization of Licensing Costs	6,000	6,000					6,000
712	Amortization of Capital Leases	19,000	19,000					19,000
713	Amortization of R&D Costs							-
714	Amortization of Goodwill							-
751	Interest Expense	25,741	18,344					18,344
755	Interest Expense Capital Lease	34,111	33,410					33,410
801	Market (Loss) Recovery- ST Equity Securities	13,125	(17,325)					(17,325)
802	Recognized Gain- Mkt Equity Securities		(4,000)					(4,000)
803	Investment Income- Mkt Equity Securities ST	(1,520)	(1,800)					(1,800)
804	Investment Income- Mkt Equity Securities LT		(39,000)					(39,000)
805	Investment Income Equity Investments	(6,474)	(37,000)					(37,000)
811	Net Unrealized Holding Gain							-
831	Income Tax Expense - Current	106,204	220,107					220,107
832	Income Tax Expense - Deferred
851	Extraordinary Items							-
860	Discontinued Operations							-
								-
		-	-		-		-	-

	Hydromaint, Inc.
	Balance Sheet
	December 31, 20x5
	Assets
		20x5	20x4
Current Assets
	Cash	$ 92,406	$ 248,490
	Accounts Receivable (net)	169,000	116,000
	Equity Securities	46,400	25,075
	Merchandise Inventory	166,490	116,790
	Supplies on Hand	21,921	20,921
	Deferred Income Tax Asset - Current	48,278	48,278
	Total Current Assets	544,495	575,554
Property, Plant and Equipment
	Land	105,000
	Buildings	215,000
	Buildings - Accumulated Depreciation	-10,750
	Equipment	90,000	30,000
	Equipment- Accumulated Depreciation	-40,000	-24,000
	Vehicles	392,286	392,286
	Vehicles - Accumulated Depreciation	-196,972	-148,143
	Leased Assets	380,000	380,000
	Leased Assets- Accumulated Depreciation	-57,000	-38,000
	Total Property, Plant and Equipment	877,564	592,143
Other Assets
	Equity Securities - Long Term	368,474	0
	Equity Securities - Equity Interest	1,750,000	368,474
	Licensing Costs, NET	0	6,000
	Total Other Assets	2,118,474	374,474
Total Assets		3,540,533	1,542,171
	Liabilities and Equity
Current Liabilities
	Accounts Payable- Inventoriable Costs	$97,690	$16,790
	Accounts Payable- Suppliers - Other Costs	38,000	29,000
	Interest Payable	35,557	42,824
	Income Tax Payable	97,142	80,095
	Short-Term Portion of Long Term Debt	77,556	69,363
	Unearned Revenue	124,000	124,000
	Total Current Liabilities	469,945	362,072
Long Term Liabilities
	Accrued Pension Liability	13,737	42,276
	Long-Term Debt Notes	78,022	147,684
	Capital Leases- Liability	317,438	325,332
	Net Pension Liability	139,155	159,034
	Deferred Income Tax Liability - Long Term	16,913	16,913
	Total Long Term Liabilities	565,265	691,239
	Total Liabilities	1,035,210	1,053,311
Owner's Equity
	Capital Stock- Common	120,000	120,000
	Capital Stock- Preferred	700,000	0
	Paid-in Capital Preferred	875,000	0
	OCI	-139,155	-159,034
	Retained Earnings	949,478	527,894
	Total Owner's Equity	2,505,323	488,860
Total Liabilities and Owner's Equity		3,540,533	1,542,17 Hydromaint, Inc. Statement of Income and Retained Earnings For the Year Ending December 31, 20x5 20x5 20x4 Revenue Sales Revenue $1,360,000 $135,000 Service Revenue 2,850,000 2,300,000 Dividend Income 77,800 7,994 Total Revenue 4,287,800 2,442,994 Costs and Expenses Cost of Goods Sold 2,416,258 1,276,500 Selling and Administrative Expenses 1,006,843 630,660 Depreciation and Amortization 100,579 97,381 Investment (gain) loss (21,325) 13,125 Interest Expense 51,754 59,852 Total Costs and Expenses 3,554,109 2,077,518 Operating Income before Taxes 733,691 365,476 Income Tax Expense 220,107 106,204 Net Income 513,584 259,272 Retained Earnings, January 1 527,894 268,622 Less Dividends Declared (92000) Retained Earnings, December 31 $949,478 $527,894 1