PROBLEM 22-7B (Continued)
(9)
Insurance Expense ($6,000 ÷ 2) ………………………………….. 3,000
PROBLEM 22-8B
Net Income for 2013
Retained Earnings 12/31/14
Item
Understated
Overstated
Understated
Overstated
1.
$6,800
0
0
0
2.
$ 15,200
0
$ 13,600
0
5.
0
0
0
Explanations:
1. The net income would be understated in 2013 because interest income
is understated. The net income would be overstated in 2014 because
2. The depreciation expense in 2013 should be $800 for this furniture.
Since the machine was bought on July 1, 2013, only one-half of a year’s
3. GAAP requires that all research and development costs should be ex–
pensed when incurred. Net income in 2013 is overstated $57,000 ($76,000
PROBLEM 22-8B (Continued)
4. The security deposit should be a long-term asset, called refundable
deposits. The $12,000 of the last month’s rent is also an asset, called
5. $14,000 or one-half of $28,000 should be reported as income each year.
In 2013, $28,000 was reported as income when only $14,000 should
6. The ending inventory would be understated since the merchandise was
omitted. Because ending inventory and net income have a direct relation-
PROBLEM 22-9B
2013
Net income, as reported
$46,000
Rent received in 2013, earned in 2014
2,000
Wages not accrued, 12/31/12
Wages not accrued, 12/31/12
Wages not accrued, 12/31/13
Inventory of supplies, 12/31/12
Inventory of supplies, 12/31/13
1,160
Corrected net income
3. To correct C.O.D. sale
(6,800)
4. Adjustment of warranty
exp:
Sales per books
Correction for consignments
Correction for C.O.D. sale
Corrected sales
Less costs charged to exp
3,910
Additional expense
$ 5,713
$ 6,365
$ 8,571
(5,713)
(6,365)
(8,571)
(a) BEACHES COMPANY
Schedule of Revised Net Income
For the Years Ended June 30, 2013, 2014, and 2015
COMPUTATIONS
SUMMARY
Increases (Decreases) in Income
2013
2014
2015
2013
2014
2015
1. Income before income
taxes, as reported
$40,600
$85,300
$78,900
2. Elimination of profit on
consignments:
Billed
$ 15,600
$ 8,800
at 120% of cost
÷ 120%
÷ 120%
Cost
$ 13,000
$7,333
Profit error
$ 2,600
$ 1,467
(2,600)
(1,467)
5. Bad debt adjustments:
Normal bad debt expense,
0.5% of sales
$ 6,044
$ 7,688
$ 10,401
Less previous write-offs
810
2,050
2,770
Additional expense
$ 5,234
$ 5,638
$ 7,631
(5,234)
(5,638)
(7,631)
7. Adjustment for
commissions
Income before income taxes
PROBLEM 22-10B (Continued)
(b) Sales Revenue ………………………………………………….. 8,800
Inventory on Consignment …………………………..……. 7,333
Cost of Goods Sold …………………………………….. 7,333
Accounts Receivable …………………………..……… 8,800
(To adjust for consignments treated
as sales, 6/30/15)
Due to Customer (held by bank) …………………………. 16,350
Finance Expense ………………………………………… 7,850
Retained Earnings ($4,600 + $3,900) …………….. 8,500
(To record finance charge reserve
held by bank)
*PROBLEM 22-11B
(a) PHIPPS INC.
Schedule of Income or Loss from Investment
For Year Ending December 31, 2014
Dividend revenue …………………………………………………………….. $25,000
(20,000 shares X $1.25 dividend/share)
(b) PHIPPS INC.
Schedule of Income or Loss from Investment
For Years Ending December 31, 2015 and 2014
2015
2014
Income from investment in Payson
(Schedule 1)
$159,500
$34,000
*PROBLEM 22-12B
January 2, 2013
Equity Investments (Available-for-sale) …………………… 600,000
Cash ………………………………………………………………. 600,000
(To record the purchase of a 10% interest in
Lawrence Corp.)
December 31, 2013
December 31, 2013
Fair Value Adjustment (Available-for-Sale) ……………… 20,000
Unrealized Holding Gain or Loss—Equity ………… 20,000
(To recognize as part of stockholders’ equity
the increase in fair value of available-for-sale
securities)
December 31, 2014
*PROBLEM 22-12B (Continued)
January 2, 2015
Equity Investment (Equity Method) …………………… 2,273,500
Cash ………………………………………………………… 2,240,000
Retained Earnings ……………………………………. 33,500
(To record purchase of additional interest
in Lawrence and to reflect retroactively
a change from the fair value to the equity
method)
Computation of Prior Period Adjustment
2013
2014
Total
January 2, 2015
Equity Investment (Equity Method) …………………… 600,000
Equity Investments (Available-for-sale) ……… 600,000
(To reclassify investment carried under
*PROBLEM 22-12B (Continued)
December 31, 2015
Equity Investment (Equity Method). ………………………… 388,875
Revenue from Investment ……………………………….. 388,875
Cash …………………………………………………………………….. 32,000
Equity Investment (Equity Method). …………………. 32,000
(To record the receipt of cash dividends
from Lawrence Corp.)