Assume Deloitte & Touche, the accounting firm, advises Pappadeaux Seafood that Pappadeaux's financial statements must be changed to conform to GAAP. At December 31, 20X7, Pappadeaux's accounts include the following:
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Cash
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$ 51,000
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Short-term trading investments, at cost
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19,000
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Accounts receivable
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37,000
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Inventory
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61,000
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Prepaid expenses
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14,000
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Total current assets
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$182,000
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Accounts payable
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$ 62,000
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Other current liabilities
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41,000
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Total current liabilities
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$103,000
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Deloitte & Touche advised Pappadeaux that • Cash includes $20,000 that is deposited in a compensating balance account that is tied up until 20X9.
- The market value of the short-term trading investments is $17,000. Pappadeaux purchased the investments a couple of weeks ago.
- Pappadeaux has been using the direct write-off method to account for uncollectible receivables. During 20X7, Pappadeaux wrote off bad receivables of $7,000. Deloitte & Touche determines that uncollectible-account expense should be 2.5% of sales revenue, which totaled $600,000 in 20X7. The aging of Pappadeaux's receivables at year end indicated uncollectibles of $5,000.
- Pappadeaux reported net income of $92,000 in 20X7.
Required
1. Restate Pappadeaux's current accounts to conform to GAAP. (Challenge)
2. Compute Pappadeaux's current ratio and acid-test ratio both before and after your corrections.
3. Determine Pappadeaux's correct net income for 20X7. (Challenge)