Hiatt Textile Corporation is planning to expand its current plant facilities and is in the process of obtaining a loan at City Bank. The bank has requested audited financial statements. Hiatt has never been audited before. It has prepared the following comparative financial statements for the years ended December 31, 2015 and 2014.
Hiatt Textile Corporation Comparative Balance Sheets December 31, 2015 and 2014 |
||
---|---|---|
2015 |
2014 |
|
Assets |
||
Current assets: |
||
Cash |
$ 602,500 |
$ 400,000 |
Accounts receivable |
980,000 |
740,000 |
Allowance for bad debts |
(92,500) |
(45,000) |
Inventory |
517,500 |
505,000 |
Total current assets |
$2,007,500 |
$1,600,000 |
2015 |
2014 |
|
---|---|---|
Plant assets: |
||
Property, plant, and equipment |
$ 417,500 |
$ 423,750 |
Accumulated depreciation |
(304,000) |
(266,000) |
Total plant assets |
$ 113,500 |
$ 157,750 |
Total assets |
$2,121,000 |
$1,757,750 |
Liabilities and Stockholders’ Equity |
||
Liabilities: |
||
Accounts payable |
$ 303,500 |
$ 490,250 |
Stockholders’ equity: |
||
Common stock, par value $25; authorized, 30,000 shares; |
||
issued and outstanding, 26,000 shares |
$ 650,000 |
$ 650,000 |
Retained earnings |
1,167,500 |
617,500 |
Total stockholders’ equity |
$1,817,500 |
$1,267,500 |
Total liabilities and stockholders’ equity |
$2,121,000 |
$1,757,750 |
Hiatt Textile Corporation Comparative Income Statements For the Years Ended December 31, 2015 and 2014 |
||
---|---|---|
2015 |
2014 |
|
Sales |
$2,500,000 |
$2,250,000 |
Cost of goods sold |
1,075,000 |
987,500 |
Gross margin |
$1,425,000 |
$1,262,500 |
Operating expenses |
$ 575,000 |
$ 512,500 |
General and administrative expenses |
300,000 |
262,500 |
$ 875,000 |
$ 775,000 |
|
Net income |
$ 550,000 |
$ 487,500 |
The following facts were uncovered during the audit.
2014: |
Ending inventory overstated by $37,750 |
2015: |
Ending inventory overstated by $49,500 |
Instructions:
1….Journal entries | Debit | Credit | |
a. | Fire Insurance premium(15500/5) | 3100 | |
Prepaid Insurance(15500/5*3) | 9300 | ||
Prior-year item(15500/5*4) | 12400 | ||
b. | Allowance for Bad debts | 12500 | |
Bad debt expense | 12500 | ||
(2500000*(2%-1.5%)) | |||
c. | Retained earnings(2014) | 37750 | |
Inventory | 37750 | ||
COGS | 11750 | ||
Inventory | 11750 | ||
(49500-37750) | |||
d. | Property,plant & Equipment | 75000 | |
Prior year item | 75000 | ||
Prior year item-Depn.(75000-12500)/10 | 6250 | ||
Depn. Expense | 6250 | ||
Acc. Depn.PP&E | 12500 |
2.Schedule showing the computation of corrected net income for the years ended December 31, 2014 and 2015 | ||
2015 | 2014 | |
Net Income | 550000 | 487500 |
(Expenses)/additions to N/I | ||
Fire Insurance premium(15500/5) | -3100 | 12400 |
Bad debt expense | -12500 | |
COGS-understated | -37750 | |
COGS-understated | -11750 | |
M/c purchase incl.as opg. Exp. | 75000 | |
Depn. Exp. | -6250 | -6250 |
Corrected net income for the year | 516400 | 530900 |
Hiatt Textile Corporation is planning to expand its current plant facilities and is in the process...
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