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:
|
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 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)