Hans Hiking 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. Hans financial statements have never been audited before. It has prepared the following comparative financial statements for the years ended December 31, 2008 and 2007. Hans Hiking Corporation Comparative Balance Sheets December 31, 2008 and 2007 2008 2007 Assets Current Assets: Cash $602,500 $400,000 Accounts receivable 980,000 740,000 Allowance for bad debts (92,500) (45,000) Inventory 517,500 505,000 Total current assets $2,007,500 $1,600,000 Plant assets: Property, plant, & equipment $417,500 $423,750 Accumulated depreciation (304,000) (266,000) Total plant assets $113,500 $157,750 Total assets $2,121,000 $1,757,750 Liabilities and Stockholders Equity Liabilities: Accounts payable $303,500 $490,250 Stockholders Equity: Common stock, par value $25: authorized, 30,000 shares; issued and outstanding 26,000 shares $650,000 $650,000 Retained earnings 1,167,500 617,500 Total stockholders equity $1,817,500 $1,267,500 Total liabilities and stockholders equity $2,121,000 $1,757,750 Hans Hiking Corporation Comparative Income Statements For the Years Ended December 31, 2008 and 2007 2008 2007 Sales $2,500,000 $2,250,000 Cost of goods sold 1,075,000 987,500 $1,425,000 $1,262,500 Operating expenses 575,000 512,500 General and administrative expenses 300,000 262,500 $875,000 $775,000 Net income $550,000 $487,500 The following facts were uncovered during the audit. a) On January 20, 2007, Hans 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. Hans has decided to reduce the amount of bad debt expense from 2% to 1.5% of sales, beginning with 2008. (A charge of 2% has already been made for 2008.) c) The inventory account (maintained on a periodic basis) has been in error the last two years. The errors were as follows: 2007 Ending inventory overstated by $37,750 2008 Ending inventory overstated by $49,500 d) A machine costing $75,000, purchased on January 4, 2007, 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 Hans. Requirements: 1) Prepare the journal entries to correct the books at December 31, 2008. The books for 2008 have not been closed. (Ignore income taxes). 2) Prepare the comparative balance sheet , income statement, and statement of retained earning for the years ended December 31, 2007 and 2008. 3) Journal entries and financial statements must be typed, any font style, 10 point font or larger. Financial statement format must be similar to the 2008/2007 unaudited financial statements provided in this problem. Retained earnings at January 1, 2007 was $130,000 Assume that Depreciation Expense is included in Operating expenses. Assume that Bad Debt Expense and Insurance expense are included in General and admin expense