Ingalls Corporation is in the process of negotiating a loan for expansion purposes. The books and records have never been audited, and the bank has requested that an audit be performed. Ingalls has prepared the following comparative financial statements for the years ended December 31, 20x4, and 20x3. Ingalls Corporation is in the Athletic Sportswear Industry and their business is merchandising. You have been asked to review the statements to ensure its accuracy and freedom from errors and omissions. During your audit, some of the findings included the following facts:

An analysis of collections and losses on accounts receivable during the past 2 years indicated a drop in anticipated losses because of bad debts. After consultation with management, it was agreed that the loss experience rate should be reduced from the recorded 2% to 1% of sales beginning with the year ended December 31, 20x4.

An analysis of the available for-sale securities revealed that this portfolio consisted entirely of short-term investments in marketable equity securities that were acquired in 20x3. The total market valuation for these investments as of the end of the year was as follows: December 31, 20x3 $ 81,000.00, and December 31, 20x4 $ 62,000.00. Management intends to sell these securities if the need arises.

The merchandise inventory at December 31, 2013, was overstated by $ 4,000.00, and the merchandise inventory at December 31, 20x4 was overstated by $ 6,100.00.

On January 2, 20x3, equipment costing $ 12,000.00 (with an estimated life of 10 years and residual value of $1,000.00) was incorrectly charged to Operating expenses. Ingalls records depreciation via the straight line method. In 20x4, fully depreciated equipment (with no residual value) that originally cost $ 17,500.00 was sold at scrap value of $ 2,500.00. Ingalls credited the proceeds of $ 2,500.00 to the equipment account.

An analysis of 20x3 operating expenses revealed that Ingalls charged the following item to expense: a 3 year insurance premium in the amount of $ 2,700.00 that started and was recorded on January 2, 20x3.

Prepare any entries to correct the books as of December 31, 20x4. The books for 20x4 have not yet been closed.

Be sure to review the existing statements for any other omissions and errors.

Prepare in proper and good form the multi-step Income Statement, Statement of Retained Earnings, and the classified Balance sheet for 20x3 and 20x4.

Each statement should be on a separate worksheet and all worksheets should be linked (Income from the Income statement is linked to the Statement of Retained Earnings). Work should be completed using Microsoft Excel. All worksheets should be in printable form.

Use the T account form to track entries.

After identifying the errors and correcting the books, prepare a memorandum Microsoft word document addressing the CEO and Board of Directors of Ingalls summarizing the effect of the errors, changes and corrected statements. Each of the corrections/changes should be in a separate paragraph.

Submit your work to the appropriate link in the weekly folder in Blackboard.

Ingalls Corporation

Comparative Balance Sheet

As of December 31, 20x4 and 20x3

December 31, 20x4 December 31, 20x3

Assets

Current Assets:

Cash $ 163,000 $ 82,000

Accounts Receivables 392,000 296,000

Allowance for doubtful accounts (37,000) (18,000)

Investment in available for-sale securities 78,000 78,000

Inventory 207,000 202,000

Total Current Assets $ 803,000 $ 640,000

Property, plant & equipment

Equipment $ 167,000 $ 169,500

Accumulated depreciation (121,600) (106,400)

Total property, plant and equipment $ _45,400 $ _63,100_

Total Assets $ 848,400 $ 703,100

Liabilities and Shareholders Equity

Liabilities:

Accounts Payable $ 121,400 $196,100

Shareholders equity

Common stock, par value$ 10, authorize

50,000 shares issued and outstanding 20,000

Shares $ 260,000 $ 260,000

Retained Earnings 467,000 247,000

Total Shareholders equity $ 727,000 $ 507,000

Total Liabilities and Shareholders Equity $ 848,000 $ 703,100

Statement of Income for the 2 years ended December 31 shown on next page

Ingalls Corporation

Statement of Income

For the years ended

December 31,

20x4 20x3

Sales $ 1, 000,000 $ 900,000

Cost of sales 430,000 395,000

Gross Profit $ 570,000 $ 505,000

Operating Expenses 210,000 205,000

Administrative Expenses 140,000 105,000

Total Operating Expenses $ 350,000 $ 310,000

Net Income $ 220,000 $ 195,000