Hiatt Textile Corporation is planning to expand its current plant facilities and is in the process of obtaining a loan at City Bank. The bank has requested audited financial statements. Hiatt has never been audited before. It has prepared the following comparative financial statements for the years ended December 31, 2013 and 2012.

The following facts were uncovered during the audit.
(a) On January 20, 2012, Hiatt had charged a 5-year fire insurance premium to expense. The total premium amounted to $15,500.
(b) Over the last two years, the amount of loss due to bad debts has steadily decreased. Hiatt has decided to reduce the amount of bad debt expense from 2% to 1.5% of sales, beginning with 2013. (A charge of 2% has already been made for 2013.)
(c) The inventory account (maintained on a periodic basis) has been in error the last two years. The errors were as follows:
2012: Ending inventory overstated by $37,750
2013: Ending inventory overstated by $49,500
(d) A machine costing $75,000, purchased on January 4, 2012, was incorrectly charged to operating expense. The machine has a useful life of 10 years and a residual value of $12,500. The straight-line depreciation method is used by Hiatt.
Instructions:
1. Prepare the journal entries to correct the books at December 31, 2013. The books for 2013 have not been closed. (Ignore income taxes.)
2. Prepare a schedule showing the computation of corrected net income for the years ended December 31, 2012 and 2013, assuming that any adjustments are to be reported on the comparative statements for the two years. Begin your schedule with the net income for each year. (Ignore income taxes.)

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Hiatt Textile Corporation Comparative Balance Sheets December 31, 2013 and 2012 2013 2012 Assets Current assets: Cash Accounts receivable Allowance for bad debts. 0,000 740,000 (45,000) 517,500 505,000 $2,007,500 $1,600,000 (92,500) Total current assets 2013 2012 Plant assets: Accumulated depreciation. (304,000 (266,000 帛113,500 乡15.1M) Total assets $2,121,000 $1,757,750 Liabilities and Stockholders' Equity Liabilities: Stockholders' equity: 1,167,500 617,500 $1,817,500 $1,267,500 $2,121,000 $1,757,750 Total stockholders' equity Total liabilities and stockholders' equity Hiatt Textile Corporation Comparative Income Statements For the Years Ended December 31, 2013 and 2012 2013 2012 Cost of goods sold Gross margin Operating expenses. General and administrative expenses. $2,500,000 $2.20000 ,075,000 987,500 $1,4%,000 S102N $ 575,000 512,500 262,500 $ 875,000 775,000 $ 550,000 487,500 ..__....J.0r,000) .._ 300,000