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Corrected Financial Statements
Heidi’s Bakery Inc. operates a small pastry business. The company has always maintained a complete and accurate set of records. Unfortunately, the company’s accountant left in a dispute with the president and took the 2016 financial statements with her. The following
The president is very disappointed with the net loss for the year because net income has averaged $21,000 over the last ten years. He has asked for your help in determining whether the reported net loss accurately reflects the profitability of the company and whether the balance sheet is prepared correctly.
Required
- Prepare a corrected income statement for the year ended December 31, 2016.
- Prepare a statement of
retained earnings for the year ended December 31, 2016. (The actual amount of retained earnings on January 1, 2016, was $39,900. The December 31, 2016, Retained Earnings balance shown is incorrect. The president simply “plugged in” this amount to make the balance sheet balance.) - Prepare a corrected balance sheet at December 31, 2016.
- Draft a memo to the president explaining the major differences between the income statement he prepared and the one you prepared.
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Chapter 1 Solutions
Financial Accounting: The Impact on Decision Makers
- Bryce Company manufactures pet supplies. However, Bryces electronic accounting system recently crashed and, unfortunately, only a partial recovery of the companys year-end accounting records (which included several profitability ratios) was possible. As a result, Bryces controller, a bright young CMA named Jeanette, must compute various lost financial account balances using the recovered information listed below. Long-term liabilities: 1,500,000 Ending inventory is the same as beginning inventory. Gross margin: 3,000,000 Net sales: 8,000,000 Accounts receivable turnover: 50 Ending accounts receivable is the same as beginning accounts receivable. Total liabilities: 2,000,000 Current ratio: 2.5 Cash: 600,000 Quick ratio: 2.0 Inventory turnover in days: 3.65 Required: 1. Calculate current liabilities. 2. Calculate current assets. 3. Calculate average accounts receivable 4. Calculate marketable securities. 5. Calculate average inventory.arrow_forwardNancy Thomas is the chief accountant at Company C, a manufacturer of medical equipment. The company is under pressure from creditors to increase its earnings. Shortly after the end of the fiscal year, the company performed a physical count of the inventory. A significant amount of inventory shrinkage was discovered. The amount is so large that it will result in a significant drop in earnings this period. The decrease in earnings will hurt the company's chance at getting a much needed loan at a low interest rate. Nancy is thinking of not reporting the shrinkage until next period, after the company gets its loan. What should Nancy do in this situation? Why?arrow_forwardCompare Two Methods of Accounting for Uncollectible Receivables Cyber Space Company, which operates a chain of 65 electronics supply stores, has just completed its fourth year of operations. The direct write-off method of recording bad debt expense has been used during the entire period. Because of substantial increases in sales volume and the amount of uncollectible accounts, the firm is considering changing to the allowance method. Information is requested as to the effect that an annual provision of ½% of sales would have had on the amount of bad debt expense reported for each of the past four years. It is also considered desirable to know what the balance of Allowance for Doubtful Accounts would have been at the end of each year. The following data have been obtained from the accounts: Year Sales Accounts ReceivableWritten Off as Uncollectible 1 2 3 4 1. $2,300,000 $5,000 $5,000 2. 4,750,000 $9,000 $4,000 $5,000 3. 9,000,000 $23,000 $2,000 $12,000…arrow_forward
- Assume that Toni Braxton Company has recently fallen into financial difficulties. By reviewing all available evidence on December 31, 2017. one of Toni Braxton's creditors, the National American Bank, determined that Tonì Braxton would pay back only 65% of the principal at maturity. As a result, the bank decided that the loan was impaired. if the loan is estimated to be $225,000 what entry should National American Bank make to record this loss? Bad Debt Expense 225,000 Allowance for Doubtful Accounts 225,000 Bad Debt Expense 146,250 Allowance for Doubtful Accounts 146,250arrow_forward(Error Analysis) Lowell Corporation has used the accrual basis of accounting for several years. A review of the records, however, indicates that some expenses and revenues have been handled on a cash basis because of errors made by an inexperienced bookkeeper. Income statements prepared by the bookkeeper reported $29,000 net income for2016 and $37,000 net income for 2017. Further examination of the records reveals that the following items were handled improperly.1. Rent was received from a tenant in December 2016. The amount, $1,000, was recorded as revenue at that time even though the rental pertained to 2017.2. Salaries and wages payable on December 31 have been consistently omitted from the records of that date and have been entered as expenses when paid in the following year. The amounts of the accruals recorded in this manner were:December 31, 2015 $1,100December 31, 2016 1,200December 31, 2017 9403. Invoices for supplies purchased have been charged to expense accounts when…arrow_forwardNote:- Do not provide handwritten solution. Maintain accuracy and quality in your answer. Take care of plagiarism. Answer completely. You will get up vote for sure.arrow_forward
- The Dubious Company operates in an industry where all sales are made on account. The company has experienced bad debt losses of 1.70% of credit sales in prior periods. Presented below is the company's forecast of sales and expenses over the next three years. Year 1 Year 2 Year 3 Sales Revenue $ 375,000 $ 381,000 $ 380,000 Bad Debt Expense Unknown Unknown Unknown Other Expenses 334,000 337,000 334,750 Net Income Unknown Unknown Unknown Required: Calculate Bad Debt Expense and net income for each of the three years, assuming uncollectible accounts are estimated as 1.70% of sales. Assume that the company changes its estimate of uncollectible credit sales to 1.70% in Year 1, 2.70% in Year 2 and 2.20% in Year 3. Calculate the Bad Debt Expense and net income for each of the three years under this alternative scenario.arrow_forwardNote:- Do not provide handwritten solution. Maintain accuracy and quality in your answer. Take care of plagiarism. Answer completely. You will get up vote for sure.arrow_forwardCalculate the allowance for uncollectible accounts for East Bay, Inc., the total balance in accounts receivable, and the net realizable value of the company’s accounts receivable. Assume that East Bay, Inc. adopts a policy of writing off as worthless all unpaid accounts receivable over 120 days old.arrow_forward
- Bailey’s Manufacturing Company is looking at changing its method of reporting bad debts expense. In past years, the company has been able to use the direct write-off method but has experienced significant growth in recent years. The accountants have prepared the following aging schedule based upon current accounts receivable volume. Balance Age of Receivable Estimated Percentage Uncollectible $245,000 Under 30 days 0.75% 135,600 30-60 days 3.50 55,660 61-120 days 20.00 32,500 121-240 days 35.00 28,750 241-360 days 45.00 18,750 Over 360 days 60.00 $516,260 Current Account Balances Allowance for Uncollectible Accounts $4,568 Cr. Net Credit Sales $1,678,975 Cash Sales 1,453,650 Total Sales $3,132,625 Accounts Receivable $516,260 Required: 1. Use the aging analysis to compute the estimated amount of uncollectible receivables. 2. Prepare the journal entry to record the estimated uncollectibles. 3. Instead of…arrow_forwardWhaley Distributors is a wholesale distributor of electronic components. Financial statements for the years ended December 31, 2016 and 2017, reported the following amounts and subtotals ($ in millions): Assets Liabilities Shareholders' Equity Net Income Expenses 2016 $ 770 $ 345 $ 425 $ 225 $ 153 2017 850 415 435 245 178 In 2018 the following situations occurred or came to light: Internal auditors discovered that ending inventories reported on the financial statements the two previous years were misstated due to faulty internal controls. The errors were in the following amounts: 2016 inventory Overstated by $ 12.3 million 2017 inventory Understated by $ 10.3 million A liability was accrued in 2016 for a probable payment of $7.6 million in connection with a lawsuit ultimately settled in December 2018 for $4.3 million. A patent costing $19.8 million at the beginning of 2016, expected to benefit operations for a total of…arrow_forwardYou joined Henderson Technology Limited as accounting manager recently. In a management meeting, William Buckle, the managing director, expressed his concern on an amount due from Hunters Limited, which is long overdue and is unlikely to be recoverable. In a review of the aged debtors report, you found that over 40% of the debtors have overdue accounts. You also noted that there is no control system in place. You believe a better credit control system would help. You are required to prepare notes for your meeting with William, to outline the objective of having a control system in place, and the key points of a credit control system that would help to reduce overdue accounts.arrow_forward
- College Accounting, Chapters 1-27AccountingISBN:9781337794756Author:HEINTZ, James A.Publisher:Cengage Learning,Managerial Accounting: The Cornerstone of Busines...AccountingISBN:9781337115773Author:Maryanne M. Mowen, Don R. Hansen, Dan L. HeitgerPublisher:Cengage Learning
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