During Hydromaint's audit, you and Pam had a number of discussions. You, Pam, and Mike Johnson are generally satisfied that the accounts are in accordance with GAAP and are supported by underlying facts. Pam tested Jerry's pension accounting (which she found to be correct) by preparing a pension worksheet based on data contained in the actuary's report:Current service cost$1,064,043ABO at 12/31/X7 2,840,000Interest on the PBO8%Interest on plan assets8Jerry has agreed to adjust his accounts and note disclosures for all corrections proposed by C & L. Pam raised a number of questions that may require adjustment. No other matters were found to be questionable. Pam's questions are as follows:1. Accounting for R&D does not appear to be in compliance with SFAS No. 2. The work is of the nature described in SFAS No. 2, para. 9, and is not being conducted for others under contract.2. Pam also noted that warranty contracts are given on all sales of pumps and valves. LS-Pump/Valve and now Hydromaint, have accounted for warranties only on the costs to "make good" when warranty claims were actually filed by customers. If warranty costs had been recognized as sales were made, the liability at January 1, 20X7, would have been $500,000. Pam noted, however, that Nick Riley and Ray Ballard were aware of the warranty contracts and took these into account in valuing the acquisition of LS-Pump/Valve. Nick and Ray did not know, however, that a liability must be recognized as warranty sales are made. Costs incurred during 20X7 to settle warranty claims amounted to $160,000. These costs were charged to cost of goods sold. It also was estimated that warranty costs applicable to 20X7 sales amounted to $146,362. Pam found out from Linda Durkee that warranty costs are deductible for tax purposes only as make-good costs are incurred.3. Mike Johnson determined that the value of the ending inventories under FIFO would have been higher than under LIFO,...
