Question

Assume Deloitte & Touche, the accounting firm, advises Deep Sea Seafood that their financial statements must be changed to confirm with GAAP. At December 31, 2016, Deep Sea Seafood accounts include the following:

Cash	$51,000
Short-term trading investments, at cost	19,000
Accounts receivable	37,000
Inventory	61,000
Prepaid expenses	14,000
Total current assets	$182,000
Accounts payable	$62,000
Other current liabilities	41,000
Total current liabilities	$103,000

Deloitte & Touche advised Deep Sea Seafood that:

• Cash includes $20,000 that is deposited in a compensating balance account that is tied up until 2018.
• The fair value of the short-term trading investments is $17,000. Deep Sea Seafood purchased the investments a couple of weeks ago.
• Deep Sea Seafood has been using the direct write-off method to account for uncollectible receivables. During 2016, Deep Sea Seafood wrote off bad receivables of $7,000. Deloitte & Touche determines that bad debt expense for the year should be 2.5% of sales revenue, which totaled $600,000 in 2016.
• Deep Sea Seafood reported net income of $92,000 in 2016.

Restate Deep Sea Seafood’s current accounts to conform to GAAP.

Compute Deep Sea Seafood’s current ratio and acid-test ratio before and after your corrections.

Determine Deep Sea Seafood’s correct net income for 2016.

Answer 1

a.)	Restate Deep Sea Seafood’s current accounts to conform to GAAP.
	Cash	31,000	( 51,000 - 20,000 )
	Short Term trading Investment	17,000	( 19,000 - 2,000 )
	Accounts Receivable	29,000	( 37,000 - (( 600,000 x 2.5% ) - 7,000 ) )
	Inventory	61,000
	Prepaid expenses	14,000
	Total Current Assets	152,000
	Accounts payable	62,000
	Other current liabilities	41,000
	Total current liabilities	103,000
b.)	Deep Sea Seafood’s current ratio and acid-test ratio before and after your corrections.
		Before	After corrections
	Current ratio	1.77	1.48
	Acid Test Ratio	1.04	0.75
c.)	Deep Sea Seafood’s correct net income for 2016.
	Net income before Correction	92,000
	Less: Additional Bad expense	8,000
	( 600,000 x 2.5% ) - 7,000
	Correct Net Income	84,000
	The fair value adjustment of $ 2,000 will go to Other Comprehensive Income.