Question

Problem 22-3

Splish Inc. was organized in late 2015 to manufacture and sell hosiery. At the end of its fourth year of operation, the company has been fairly successful, as indicated by the following reported net incomes.

2015		$139,000a		2017		$206,000
2016		162,000b		2018		279,000

^a Includes a $10,000 increase because of change in bad debt experience rate.
^b Includes a gain of $30,000.

The company has decided to expand operations and has applied for a sizable bank loan. The bank officer has indicated that the records should be audited and presented in comparative statements to facilitate analysis by the bank. Splish Inc. therefore hired the auditing firm of Check & Doublecheck Co. and has provided the following additional information.

1.		In early 2016, Splish Inc. changed its estimate from 2% of receivables to 1% on the amount of bad debt expense to be charged to operations. Bad debt expense for 2015, if a 1% rate had been used, would have been $10,000. The company therefore restated its net income for 2015.
2.		In 2018, the auditor discovered that the company had changed its method of inventory pricing from LIFO to FIFO. The effect on the income statements for the previous years is as follows.

		2015		2016		2017		2018
Net income unadjusted—LIFO basis		$139,000		$162,000		$206,000		$279,000
Net income unadjusted—FIFO basis		154,000		167,000		217,000		262,000
		$15,000		$5,000		$11,000		$(17,000)

3. In 2018, the auditor discovered that:

(a)		The company incorrectly overstated the ending inventory (under both LIFO and FIFO) by $13,000 in 2017.
(b)		A dispute developed in 2016 with the Internal Revenue Service over the deductibility of entertainment expenses. In 2015, the company was not permitted these deductions, but a tax settlement was reached in 2018 that allowed these expenses. As a result of the court’s finding, tax expenses in 2018 were reduced by $55,000.

(b) Present net income as reported in comparative income statements for the years 2015 to 2018. (Enter amounts that decrease net income using either a negative sign preceding the number e.g. -15,000 or parentheses e.g. (15,000).)

SPLISH INC. Comparative Income Statements For the Years 2015 through 2018
		2015		2016		2017		2018
Net income (unadjusted)		$		$		$		$
1. Bad debt expense adjustment
2. Inventory adjustment (FIFO)
3. Inventory overstatement
Net income (adjusted)		$		$		$		$

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Answer 1

Splish Inc. Comparative Income Statements For the year 2015 through 2018 Particulars Notes 2015 $ 139000 2016 $ 162000 2017 $ 206000 2018 $ 279000 10000 Net Income (unadjusted) Adjustments: Bad debt expense adjustment Note 1 Gain Note 2 Inventory adjustment (FIFO) Note 3 Inventory Overstatement Note 4 Tax expense Note 5 -30000 5000 15000 11000 - 13000 13000 -55000 Net Income (adjusted) 164000 137000 | 204000 237000 Note: 1. Bad Debt expense of $ 10000 will be added to unadjusted Net income to make the income comparative. 2. Considering Gain of $ 30000 to be abnormal in nature, the same will be reduced to unadjusted Net income to make the income comparative. 3. Inventory value of prior years will be adjusted as per FIFO to make the income comparative. 4. Inventory overstatement will be adjusted in 2017 ending inventory and 2018 opening inventory to make the income comparative. 5. Tax expense adjustment will be adjusted in 2018 unadjusted net income to make the income comparative.