Problem
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.
Requirements
1. Restate Deep Sea Seafood's current accounts to conform to GAAP.
2. Compute Deep Sea Seafood's current ratio and acid-test ratio before and after your corrections.
3. Determine Deep Sea Seafood's correct net income for 2016.