P22.2B (LO 1,2,3) (Comprehensive Accounting Change and Error Analysis Problem) Royal Palm Inc. was organized in late 2017 to manufacture and sell personal water craft. At the end of its third year of operation, the company has been fairly suc- cessful, as indicated by the following reported net incomes. 2018 2019 $230,000 205,000* 2020 $240,000 "Includes unusual loss of $45,000. "Includes a $26,000 increase because of change in bad debt experience rate. In March 2021, the company has decided to expand operations and has applied for a sizable bank loan. The bank officer has indicated that the records should be audited and presented in comparative statements to facilitate analysis by the bank. Royal Palm Inc. therefore hired an auditing firm and has provided the following additional information: 1. In early 2021, Royal Palm Inc. changed its estimate from 2.5% to 1.8% on the amount of bad debt expense to be charged to operations. Bad debt expense for 2020, if a 1.8% rate had been used, would have been $26,000 less. The company therefore restated its net income for 2020. 2. The auditor discovered that the company had changed its method of inventory pricing from LIFO to FIFO in 2021. The effect on the income statements for the previous years is as follows: Net income unadjusted-LIFO basis Net income unadjusted-FIFO basis 2018 $230,000 240,000 2019 $205,000 225,000 2020 $240,000 255,000 $ 10,000 $ 20,000 $ 15,000 3. In 2021, the auditor discovered that: (a) The company incorrectly understated the ending inventory by $12,000 in 2017. (b) A dispute developed in 2018 with the Internal Revenue Service over the deductibility of certain expenses. In 2018, the company was not permitted these deductions, but a tax settlement was reached in 2021 that allowed these expenses. As a result of the court's finding, tax expenses in 2021 were reduced by $31,000. 2 Chapter 22 Accounting Changes and Error Analysis Instructions (a) Indicate how each of these changes or corrections should be handled in the accounting records. (Ignore income tax considerations.) (b) Present comparative income statements for the years 2018 to 2020, starting with income before unusual loss. (Ignore income tax considerations.)