Ingalls Corporation is in the process of negotiating a loan for expansion purpos
ID: 2483176 • 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
Part 1)
The journal entries are as follows:
_________
Part 2)
The corrected income statements are given as below:
S.No. Account Titles Debit Credit 1) Allowance for Uncollectible Accounts (1,000,000*1%) $10,000 Administrative Expenses $10,000 (To indicate reduction in loss experience rate) 2) Unrealized Decline in Value of Securities Available for Sale $16,000 Allowance for Change in Value of Investment $16,000 (To adjust the value of securities available for sale) 3) Retained Earnings $4,000 Cost of Sales $2,100 Merchandise Inventory $6,100 (To adjust overstatement of inventory) 4) Equipment $12,000 Operating Expenses $1,100 Retained Earnings $10,900 Accumulated Depreciation – Equipment $2,200 (To adjust incorrect posting of purchase of equipment in 2016) Accumulated Depreciation – Equipment $17,500 Equipment $15,000 Other Income $2,500 (To adjust for incorrect posting of sale of equipment) 5) Prepaid Expenses $900 Operating Expenses $900 Retained Earnings $1,800 (To adjust for nonrecognition of prepaid expense) 6) Common Stock $60,000 Paid-in Capital in Excess of Par $60,000 (To record adjustment for capital contribution in excess of par value)