Ingalls Corporation is in the process of negotiating a loan for expansion purpos
ID: 2482010 • Letter: I
Question
Ingalls Corporation is in the process of negotiating a loan for expansion purposes. The books and records have never been audited, and the bank has requested that an audit be performed. Ingalls has prepared the following comparative financial statements for the years ended December 31, 2017 and 2016:
Ingalls Corporation
Balance Sheet
As of December 31, 2016 and 2017
1
2017
2016
2
Assets
3
Current Assets:
4
Cash
$163,000.00
$82,000.00
5
Accounts receivable
392,000.00
296,000.00
6
Allowance for doubtful accounts
(37,000.00)
(18,000.00)
7
Investment in available-for-sale securities
78,000.00
78,000.00
8
Inventory
207,000.00
202,000.00
9
Total current assets
803,000.00
640,000.00
10
Property, plant, and equipment:
11
Equipment
$167,000.00
$169,500.00
12
Accumulated depreciation
(121,600.00)
(106,400.00)
13
Total property, plant, and equipment
45,400.00
63,100.00
14
Total Assets
$848,400.00
$703,100.00
15
Liabilities and Shareholders’ Equity
16
Liabilities:
17
Accounts payable
121,400.00
196,100.00
18
Shareholders’ equity:
19
Common stock, par value $10, authorized 50,000 shares, issued and outstanding 20,000 shares
$260,000.00
$260,000.00
20
Retained earnings
467,000.00
247,000.00
21
Total shareholders’ equity
727,000.00
507,000.00
22
Total Liabilities and Shareholders’ Equity
$848,400.00
$703,100.00
Ingalls Corporation
Income Statement
For the Years Ended December 31, 2016 and 2017
1
2017
2016
2
Sales
$1,000,000.00
$900,000.00
3
Cost of sales
(430,000.00)
(395,000.00)
4
Gross profit
570,000.00
505,000.00
5
Operating expenses
$210,000.00
$205,000.00
6
Administrative expenses
140,000.00
105,000.00
7
(350,000.00)
(310,000.00)
8
Net income
$220,000.00
$195,000.00
During the course of the audit, the following additional facts were determined:
•
An analysis of collections and losses on accounts receivable during the past 2 years indicates a drop in anticipated losses because of bad debts. After consultation with management, it was agreed that the loss experience rate on sales should be reduced from the recorded 2% to 1%, beginning with the year ended December 31, 2017.
•
An analysis of the available-for-sale securities revealed that this portfolio consisted entirely of short-term investments in marketable equity securities that were acquired in 2016. The total market valuation for these investments as of the end of each year was as follows: December 31, 2016, $81,000; December 31, 2017, $62,000.
•
The merchandise inventory at December 31, 2016, was overstated by $4,000, and the merchandise inventory at December 31, 2017, was overstated by $6,100.
•
On January 2, 2016, equipment costing $12,000 (estimated useful life of 10 years and residual value of $1,000) was incorrectly charged to Operating Expenses. Ingalls records depreciation via the straight-line method. In 2017, fully depreciated equipment (with no residual value) that originally cost $17,500 was sold as scrap for $2,500. Ingalls credited the proceeds of $2,500 to Equipment.
•
An analysis of 2016 operating expenses revealed that Ingalls charged to expense a 3-year insurance premium of $2,700 on January 15, 2016.
Required:
1.
Prepare the journal entries to correct the books at December 31, 2017. The books for 2017 have not been closed. Ignore income taxes.
2.
Prepare a schedule showing the computation of corrected net income for the years ended December 31, 2017 and 2016, assuming that any adjustments are to be reported on comparative statements for the 2 years. The first items on your schedule should be the net income for each year. Ignore income taxes. (Do not prepare financial statements.)
Ingalls Corporation
Balance Sheet
As of December 31, 2016 and 2017
Explanation / Answer
1)
1) Allowance for doubtful accounts 9500 Retained Earnings 9500 Excess 1 % allowance on average sale of 950000, reversed average sale = (900000 + 1000000)/2 = 950000 reversal = 950000 x 1% , =9500 During the year there is increase in allowance for doubtful accoubts by 19000 i.e 2% on average sale accordingly on same basis we have reversed 1 % excess allowance 2) Retained earnings 16000 Investment in available for sale securities 16000 We will adjust available for sale securities to their market value and record unrealised loss . Instead of passsing entry to unrealised loss accont , we have made direct entry to retained earnings and recorded loss on account of fall in value 3) Retained earnings 6100 Inventory 6100 We will adjust overstated closing inventory at end of 2017 to retained earnings and there by correct overstated profits Effect of overstated closing stock of 2016 Rise in profits in 2016 = 4000 Fall In profits of 2017 = 4000 Retained earnings will have nil effect from this overstatement by end of 2017 4) Equipment 12000 Retained earnings 9800 Accumulated depreciation 2200 Reversal on account of wrong recording of equipment Depreciation on asset under straight line method = = ( cost of asset - salvage value) / life of asset = (12000-1000) / 10 1100 Depreciation to be charged for 2016 & 2017 = 1100 x 2, = 2200 Amount charged to opearting expense 12000 Excess charged to profits = 12000-2200, = 9800 5) Accumulated depreciation 17500 Retained earnings 2500 Equipment 15000 proper Recoding of sale of asset Since equipment is completely depreciated we need to write off accumulated depreciation on this equipment to equipment account and amount realised on this equipment should form part of profits which was wrongly recorded to equipment account Through above entry we recorded gain in retained earnings account , write off accumulated depreciation and equipment is already credited by 2500 , now remaining 15000 completes the entry 6) Prepaid insurance 900 Retained earninngs 900 Since only 1 year is left unexpired only 1 year relevant amount will be carried forward = 2700 / 3, = 900