Assume Williams & Sellers, the accounting firm, advises Ocean Mist Seafood that its financial statements must be changed to conform to GAAP. At December 31, 2016, Ocean Mist's accounts include the following:
Cash .......................................................... $50,000
Investment in trading securities, at cost .................. 26,000
Accounts receivable ......................................... 42,000
Inventory ..................................................... 62,000
Prepaid expenses ............................................ 11,000
Total current assets ...................................... $191,000
Accounts payable ......................................... $66,000
Other current liabilities .................................... 40,000
Total current liabilities ................................. $106,000
The accounting firm advised Ocean Mist of the following:
• Cash includes $18,000 that is deposited in a compensating balance account that is tied up until 2018.
• The market value of the trading securities is $17,000. Ocean Mist purchased the investments a couple of weeks ago.
• Ocean Mist has been using the direct write-off method to account for uncollectible receivables. During 2016, Ocean Mist wrote off bad receivables of $4,000. The aging of Ocean Mist's receivables at year-end indicated uncollectibles of $26,500.
• Ocean Mist reported net income of $94,000 in 2016.
Requirements
1. Restate Ocean Mist's current accounts to conform to GAAP. (Challenge)
2. Compute Ocean Mist's current ratio and quick (acid-test) ratio both before and after your corrections.
3. Determine Ocean Mist's correct net income for 2016. (Challenge)