Revised income before income taxes


Assignment: (Error Analysis and Correcting Entries)  You have been asked by a client to review the records of Larry Landers Company, a small manufacturer of precision tools and machines.  Your client is interested in buying the business, and arrangements have been made for you to review the accounting records.  Your examination reveals the following:

Question 1. Landers Company commenced business on April 1, 2005, and has been reporting on a fiscal year ending March 31.  The company has never been audited, but the annual statements prepared by the bookkeeper reflect the following income before closing and before deducting income taxes.

Year Ended March 31     Income before Taxes

2006                                    $71,600

2007                                    111,400

2008                                    103,580

Question 2. A relatively small number of machines have been shipped on consignment. These transactions have been recorded as ordinary sales and billed as such.  On March 31 of each year, machines billed and in the hands of consignees amounted to:

2006               $6,500

2007                none

2008               5,590

Sales price was determined by adding 30% to cost. Assume that the consigned machines are sold the following year.

Question 3. On March 30, 2007, two machines were shipped to a customer on a C.O.D. basis.  The sale was not entered until April 5, 2007, when cash was received for $6,100. The machines were not included in the inventory at March 31, 2007. (Title passed on March 30, 2007.)

Question 4. All machines are sold subject to a 5-year warranty.  It is estimated that the expense ultimately to be incurred in connection with the warranty will amount to 1/2 of 1% of sales. The company has charged an expense account for warranty costs incurred.

Sales per book and warranty costs were as follows:

Year ended                             Warranty Expense for Sales Made In:

  March 31          Sales                 2006       2007         2008         Total          

    2006            $ 940,000            $760                                        $ 760                      

    2007            1,010,000             360       $1,310                        1,670                     

    2008            1,795,000             320        1,620        1,910         3,850

Question 5. A review of the corporate minutes reveals the manager is entitled to a bonus of ½ of 1% of the income before deducting income taxes and the bonus. The bonuses have never been recorded or paid.

Question 6. Bad debts have been recorded on a direct write-off basis. Experience of similar enterprises indicates that losses will approximate 1/4 of 1% of sales.  Bad debts written off were:

                               Bad Debts Incurred on Sales Made In:

                           2006            2007                2008             Total

2006                    $750                                                          $750

2007                     800             $520                                      1,320

2008                     350            1,800                1,700              3,850

Question 7.  The bank deducts 6% on all contracts financed.  Of this amount, ½% is placed in a reserve to the credit of Landers Company that is refunded to Landers as finance contracts are paid in full.  The reserve established by the bank has not been reflected in the books of Landers.  The excess of credits over debits (net increase) to the reserve account with Landers on the books of the bank for each fiscal year were as follows:

2006              3,000

2007              3,900

2008              5,100

                    $12,000


Question 8. Commissions on sales have been entered when paid.  Commissions payable on March 31 of each year were as follows:

2006     $1,400
2007          800
2008       1,120

Instructions:
      
(a.) Present a schedule showing the revised income before income taxes for each of the years ended March 31, 2006, 2007, and 2008.  Make computations to the nearest whole dollar.

(b.) Prepare the journal entry or entries you would give the bookkeeper to correct the books. Assume the books have not yet been closed for the fiscal year ended March 31, 2008.  Disregard correction of income taxes.

Solution Preview :

Prepared by a verified Expert
Accounting Basics: Revised income before income taxes
Reference No:- TGS01933362

Now Priced at $20 (50% Discount)

Recommended (90%)

Rated (4.3/5)