Analyze accounting methods and prepare corrected income statement. (LO 1, 2, 4) You are the accountant for Baldwin Company, and your assistant has prepared the following income statement for the year ended September 30, 2007.

You have uncovered the following errors:
1. Sales revenue includes \(\$ 5,000\) of items that have been back-ordered. (The items have not been delivered to the customers, and the customers have not been billed for the items.)
2. Selling expenses includes \(\$ 250\) of allowances that were given to customers who received damaged products.
3. Insurance expense includes \(\$ 100\) worth of insurance that applies to 2008 .
4. Administrative expenses include a loan made to worker who had some serious financial trouble and needed \(\$ 500\) to pay a hospital bill. The worker plans to repay the money by the end of December.
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a. Prepare a corrected multistep income statement for the year. Baldwin shows sales as the net amount only on its income statement.

b. Write a memo to your assistant explaining why each error you found is incorrect and what the correct accounting treatment should be.

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Baldwin Company Income Statement For the year ended September 30, 2007 Sales revenue Sales returns and allowances $850,000 Freight costs $22,500 14,300 (36,800) Net sales 813,200 Expenses Cost of goods sold 540,000 Selling expenses 150,000 Insurance expense 20,000 Administrative expenses 40,000 Dividends 8,000 Total expenses Net income 758,000 $ 55,200