Intermediate Accounting:
Problem 1: Botticelli Inc. was organized in late 2010 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.
2010 $140,000
2011 $160,000
2012 $205,000
2013 $276,000
a. Includes a $10,000 increase because of change in bad debt experience rates
b. Includes extraordinary gain of $30,000.
The company has decided to expand operations and has applied for a sizable bank loan. The company wants to get into the White Board Cleaning Fluid Business. The bank officer has indicated that the records of Sam Houston Inc. should be audited and presented in comparative statements to facilitate analysis by the bank. Botticelli Inc. therefore hired the auditing firm of Check and Double-check Co. and has provided the following additional information to the CPA firm.
In early 2011, Botticelli Inc. changed its estimate from 2% to 1% on the amount of bad debt expense to be charged to operations. Bad debt expense for 2010, if a 1% rate had been used, would have been $10,000. The company therefore restated its net income for 2010.
Problem 2. In 2013, 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.
Net income unadjusted LIFO basis
2010: $140,000
2011: $160,000
2012: $205,000
2013: $276,000
Net income unadjusted FIFO basis
2010: $155,000
2011: $165,000
2012: $215,000
2013: $260,000
Problem 3. In 2013, the auditor discovered that:
a. The company incorrectly overstated the ending inventory by $14,000 in 2012.
b. A dispute developed in 2011 with the Internal Revenue Service over the deductibility of entertainment expenses. In 2010, the company was not permitted these deductions, but a tax settlement was reached in 2013 that allowed these expenses. As a result of the court's finding, tax expenses in 2013 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 comparative income statements for the years 2010 to 2013, starting with income before extraordinary items. Ignore income tax considerations.