Analyze accounting methods and prepare corrected income statement.
You are the accountant for Baldwin Company, and your assistant has prepared the followings income statement for the year ended September 30, 2001.
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Baldwin Company |
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Sales revenue |
$850,00 |
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Sales returns and allowances |
$225, 00 |
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Freight costs |
14,300 |
36,800 |
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Net sales |
813,200 |
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Expenses |
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Cost of goods sold |
540,000 |
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Selling expenses |
1 50,000 |
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Insurance expense |
20,000 |
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Administrative expenses |
40,000 |
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Dividends |
8,000 |
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Total expenses |
758,000 |
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Net income |
$ 55,200 |
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You have uncovered the following errors:
1. Sales revenue includes $5,000 of items that have been back-ordered. (The items have not been delivered to the customers, and the customers have not been billed for the items.)
2. Selling expenses includes $250 of allowances that were given to customers who received damaged product.
3. Insurance expense includes $100 worth of insurance that applies to 2008.
4. Administrative expenses include a loan made to worker who had some serious financial trouble and needed $500 to pay a hospital bill. The worker plans to repay the money by the end of December.
Required
a. Prepare a corrected multistep income statement for the year. Baldwin shows sales as the net amount only on its income statement.
b. Write a memo to your assistant explaining why each error you found is incorrect and what the correct accounting treatment should be.