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Q9P.

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Intermediate Accounting (Kieso)
Found in: Page 1319

Short Answer

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 for 2016 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 $1,100

December 31, 2016 1,200

December 31, 2017 940

3. Invoices for supplies purchased have been charged to expense accounts when received. Inventories of supplies on hand at the end of each year have been ignored, and no entry has been made for them.

December 31, 2015 $1,300

December 31, 2016 940

December 31, 2017 1,420

Instructions

Prepare a schedule that will show the corrected net income for the years 2016 and 2017. All items listed should be labeled clearly. (Ignore income tax considerations.)

The net income is revenues minus expenses, and the correct net income for 2016 is $27,540 and for 2017 is $38,740.

See the step by step solution

Step by Step Solution

Step 1: Definition of Net Income

The net income is the income computed by deducting all direct and indirect expenses incurred during the year from revenues generated during the year.

Step 2: Schedule showing corrected net incomes

2016 ($)

2017 ($)

Net Income as reported

29,000

37,000

Rent received in 2016, earned in 2017

-1,000

1,000

Salaries and wages not accrued, 12/31/15

1,100

Salaries and wages not accrued, 12/31/16

-1,200

1,200

Salaries and wages not accrued, 12/31/17

-940

Inventory of supplies, 12/31/15

-1,300

Inventory of supplies, 12/31/16

940

-940

Inventory of supplies, 12/31/17

1,420

Corrected Net Income

27,540

38,740

Most popular questions for Business-studies Textbooks

Botticelli Inc. was organized in late 2015 to manufacture and sell hosiery. At the end of its fourth year of operation, the company has been fairly successful, as indicated by the following reported net incomes.

2015 $140,000a 2017 $205,000

2016 160,000b 2018 276,000

a Includes a $10,000 increase because of change in bad debt experience rate.

bIncludes a gain of $30,000.

The company has decided to expand operations and has applied for a sizable bank loan. The bank officer has indicated that the records should be audited and presented in comparative statements to facilitate analysis by the bank. Botticelli Inc. therefore hired the auditing firm of Check & Doublecheck Co. and has provided the following additional information.

1. In early 2016, Botticelli Inc. changed its estimate from 2% of sales to 1% on the amount of bad debt expense to be charged to operations. Bad debt expense for 2015, if a 1% rate had been used, would have been $10,000. The company therefore restated its net income for 2015.

2. In 2018, the auditor discovered that the company had changed its method of inventory pricing from LIFO to FIFO. The effect on the income statements for the previous years is as follows.

2015 2016 2017 2018

Net income unadjusted—LIFO basis $140,000 $160,000 $205,000 $276,000

Net income unadjusted—FIFO basis 155,000 165,000 215,000 260,000

$ 15,000 $ 5,000 $ 10,000 $ (16,000)

3. In 2018, the auditor discovered that:

(a) The company incorrectly overstated the ending inventory (under both LIFO and FIFO) by $14,000 in 2017.

(b) A dispute developed in 2016 with the Internal Revenue Service over the deductibility of entertainment expenses. In 2015, the company was not permitted these deductions, but a tax settlement was reached in 2018 that allowed these expenses. As a result of the court’s finding, tax expenses in 2018 were reduced by $60,000.

Instructions

(a) Indicate how each of these changes or corrections should be handled in the accounting records. (Ignore income tax considerations.)

(b) Present net income as reported in comparative income statements for the years 2015 to 2018

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