Assume Spahr and Kennedy, the accounting firm, advises Arctic Seafood that its financial statement must be changed to conform to GAAP. At December 31, 2016, Arctic's accounts include the following:
Cash ....................................................... $55,000
Investment in trading securities, at cost ................ 22,000
Accounts receivable ......................................, 36,000
Inventory ................................................... 63,000
Prepaid expenses .......................................... 18,000
Total current assets ..................................... $194,000
Accounts payable ....................................... $62,000
Other current liabilities .................................. 37,000
Total current liabilities ................................. $99,000
The accounting firm advised Arctic of the following:
• Cash includes $22,000 that is deposited in a compensating balance account that is tied up until 2018.
• The market value of the trading securities is $16,000. Arctic purchased the investments a couple of weeks ago.
• Arctic has been using the direct write-off method to account for uncollectible receivables. During 2016, Arctic wrote off bad receivables of $8,500. The aging of Arctic's receivables at year-end indicated uncollectibles of $22,000.
• Arctic reported net income of $95,000 for 2016.
Requirements
1. Restate Arctic's current accounts to conform to GAAP. (Challenge)
2. Compute Arctic's current ratio and quick (acid-test) ratio both before and after your corrections.
3. Determine Arctic's correct net income for 2016. (Challenge)