Assume Adams & Murray, the accounting firm, advises Pappadeaux Seafood that its financial statements must be changed to conform to GAAP. At December 31, 2012, Pappadeaux’s accounts include the following:

Cash..................................................................................... $ 59,000

Short-term investment in trading securities, at cost .............. 27,000

Accounts receivable.............................................................. 37,000

Inventory.............................................................................. 60,000

Prepaid expenses .................................................................. 17,000

Total current assets .......................................................... $200,000

Accounts payable ................................................................. $ 61,000

Other current liabilities ........................................................ 36,000

Total current liabilities ..................................................... $ 97,000

The accounting firm advised Pappadeaux of the following:

Cash includes $18,000 that is deposited in a compensating balance account that is tied up until 2014.

The market value of the trading securities is $13,000. Pappadeaux purchased the investments a couple of weeks ago.

Pappadeaux has been using the direct write-off method to account for uncollectible receivables. During 2012, Pappadeaux wrote off bad receivables of $8,000. Adams & Murray determines that uncollectible-account expense should be 3% of service revenue, which totaled $590,000 in 2012. The aging of Pappadeaux’s receivables at year-end indicated uncollectibles of $9,700.

Pappadeaux reported net income of $90,000 in 2012.

Requirements

1. Restate Pappadeaux’s current accounts to conform to GAAP. (Challenge)

2. Compute Pappadeaux’s current ratio and quick (acid-test) ratio both before and after your corrections.

3. Determine Pappadeaux’s correct net income for 2012.(Challenge)