At year-end, the accounting department at Bell-Jones Industries had prepared the following
balance sheet and income statement.
Balance sheet Income statement
Cash $ 58,000 Net sales $ 1,855,000
Accounts receivable 215,000 Service contracts 792,000
Less: Allowance for returns 9,000 Cost of goods sold (1,298,500)
Allowance for doubtful accounts (3,000) Operating expenses:
Merchandise 136,000 Wages (537,300)
Buildings and equipment 413,000 Rent (60,000)
Less: Accumulated depreciation (107,800) Advertising (282,000)
Land 79,000 Doubtful accounts 0
Total assets $ 799,200 Depreciation (26,800)
Warranties (55,000)
Accounts payable $ 108,200 Operating income $ 387,400
Wages payable 25,000 Interest revenue 1,350
Warranty obligations 61,000 Income before taxes 388,750
Common stock 300,000 Provision for taxes 136,063
Retained earnings 305,000 Net income $ 252,687
Total liabilities and stockholders' equity $ 799,200
Just prior to the arrival of the outside auditors, one of the accounting staff brought a list of items to the chief financial officer. The staff member was concerned that these items had not been properly accounted for in the financial statements.
1. A source document showing a customer's return of goods had been missing until just now and had not been processed through the accounting system. The goods had been sold on account to the customer for $9,000 during the current year and were returned to the warehouse for sale to others. The company's normal gross profit on sales is 30%.
2. Just before year-end, inventory had been purchased on credit at a cost of $60,000, FOB destination. By year-end, it had not yet arrived but it had been included in the ending inventory anyway.
3. At the end of the prior year, there was $80,000 of inventory in transit from a supplier. The goods had been purchased FOB shipping point but had not yet arrived. The goods had been included in last year's ending inventory anyway.
4. An error had been made in computing the warranty costs for goods sold during the current year. A total of $55,000 had been charged to Warranty Expense, but the correct amount was $75,000.
5. Near year-end, a $100,000 service contract was obtained from a major customer. It was a renewal of an existing contract that would otherwise have expired during the coming year. Because this type of work had been performed many times before for this customer, the contract was entered into the accounting system as a credit sale during the year just ended. Collection of the cash will occur as the services are performed.
6. The adjusting entry to allowance for returns had not yet been recorded at year-end. Using the firm's usual approach, an additional $10,300 should be recorded.
7. No adjusting entry had been made at year-end to account for doubtful accounts. Using the firm's usual approach, $5,960 should be charged to expense.
Required
A. Show any entries to the accounting system that you believe should be made as a result of this information. If an item does not require an entry, explain why.
B. What is the proper amount of operating income that should be reported for the period? Prepare a schedule to show how you determined this amount.