INSTRUCTIONS You are employed as an analyst in the credit department of a commercial bank. You are asked to analyze the financial statements of XYZ Imports, a local company that manufactures electronic components for computers. The company also maintains a small research and development staff. The company is privately owned, and its financial statements have not been audited and may not have been prepared in accordance with generally accepted accounting principles (GAAP) Your discussions with XYZ's bookkeeper reveal the following 1. 2. 3. 4. XYZ recognizes revenue when merchandise is ordered. At year-end, $200,000 of merchandise ordered during 2019 had not been shipped XYZ has not established an allowance for its uncollectible accounts receivable Historically, 5% of the ending accounting receivable balance has been uncollectible XYZ recognizes interest expense when paid. XYZ acquired the note payable on July 1, 2019, at an interest rate of 4% annually. Interest is paid annually on June 30th XYZ's total research and development expenditures for 2019 amounted to $1,000,000 XYZ's policy with respect to capitalized R&D costs was to begin amortization only after a commercially viable asset had been developed; to date, no viable asset had resulted from the research program represen ted by the currently capitalized R&D costs REQUIRED Given the information above, provide XYZ's restated balance sheet and income statement in a manner consistent with GAAP. Your supervisor also requests a statement of retained earnings for the year ended 12/31/2019. XYZ did not declare or pay dividends during 2019. Assume a tax rate of 20%. a. b. Provide supporting documentation for the restatement. That is, for each item above, provide the journal entry (or entries) if an adjustment is required, along with a clear, concise explanation of how you determined the appropriate adjustment. Any assumptions should be made explicit. XYZ Imports Balance Sheet As of December 31, 2019 Assets Current assets Liabilities Current abilities: Cash Accounts receivable Inventories Prepaid expenses s 444,000 820,000 1,720,000 30.000 Accounts payable Accrued expenses payable $800,000 100,000 $900,000 Total current liabilities Total current assets $3,014,000 Noncurrent liabilities Notes payable $2.120.000 Noncurrent assets Property, plant & equipment, gross 3,940,000 Total Liabilities Less: Accumulated depreciationn Property, plant & equipment, net $3,020,000 (1360.000) 2,580,000 Owners' equity Common stock, $1 par 2,000,000 2.284,000 4.284.000 Land Deferred research & development costs Total assets 1,060,000 Retained earnings 650,000 Total owners equity S7304000 Total liabilities & owners' equity XYZ Imports Income Statement For the Year Ended December 31, 2019 Sales revenue Less: Cost of sales $4,950,000 Beginning inventory Cost of production Goods available for sale Less: Ending inventory $1,205,000 3,665,000 4,870,000 1,720,000 3,150,000 1,800,000 Gross margin Less: Research & development expen 350,000 100,000 400,000 se Depreciation expense Selling and administrative expenses Net income before taxes Less; income taxes Net income after taxes (850,000) 950,000 190,000 $760,000
