Problem 2 (25 points). Pasteur Company's net income for the past three years is: 20X3, $240,000; 20X2, $225,000; and 20X1, $180,000. During the 20X3 year end audit, the attached items have come to your attention. REQUIRED: (1) (2) Prepare the necessary entries, in proper general journal form, to correct the books for the transactions attached. Assume that the books have not been closed for the current year, 20X3. Omit explanations. Use the letter of the transaction as the date. Present comparative income statement data for the years 20X1 to 20X3, in accordance with generally accepted accounting principles, starting with income from continuing operations before required adjustments. Prepare pro forma amounts. Ignore all income tax effects. Assume that the beginning retained earnings balance (unadjusted) for 20X2 was $630,000. At what adjusted amount should this beginning retained earnings balance for 20X2 be stated, assuming that comparative financial statements were prepared? Assume that the beginning retained earnings balance (unadjusted) for 20X3 is $900,000 and that comparative financial statements are not prepared. At what adjusted amount should this beginning retained earnings balance be stated? (a) (b) Pasteur bought a truck on January 1, 20X1, for $98,000 with an $8,000 estimated salvage value and an estimated life of six years. The company debited the repair expense account and credited cash on the purchase date for the entire cost of the asset. The company uses straight line depreciation for such assets. During 20X3, Pasteur changed from the straight line method of depreciating its buildings to the sum-of-the-years'-digits method. The buildings had an original cost of $1,000,000 and were purchased on January 1, 20X0, with an estimated salvage value of $100,000. It is estimated that the buildings will have a total useful life of 25 years. The net income for 20X3 was computed using the new depreciation method. Pasteur has decided to switch from the direct write off method in accounting for bad debt expense to the percentage of sales approach. Assume that Pasteur has recognized bad debt expense as the receivables have actually become uncollectible in the following way. 2 20X2 $ From 20X2 sales From 20X3 sales 21,200 --- 0X3 $ 8,000 30,000 The controller estimates that an additional $43,600 will be charged off in 20X4: $7,600 applicable to 20X2 sales and $36,000 to 20X3 sales. (d) During the current year, the company sold $600,000 of goods on the installment basis. The cost associated with these goods sold is $450,000. The company inadvertently handled these sales and related costs as part of the regular sales transactions. Cash of $172,000, including a down payment of $60,000, was collected on these installment sales during the current year. Due to concern as to the collectibility of these sales, the installment method was considered appropriate. Problem 2 (25 points). Pasteur Company's net income for the past three years is: 20X3, $240,000; 20X2, $225,000; and 20X1, $180,000. During the 20X3 year end audit, the attached items have come to your attention. REQUIRED: (1) (2) Prepare the necessary entries, in proper general journal form, to correct the books for the transactions attached. Assume that the books have not been closed for the current year, 20X3. Omit explanations. Use the letter of the transaction as the date. Present comparative income statement data for the years 20X1 to 20X3, in accordance with generally accepted accounting principles, starting with income from continuing operations before required adjustments. Prepare pro forma amounts. Ignore all income tax effects. Assume that the beginning retained earnings balance (unadjusted) for 20X2 was $630,000. At what adjusted amount should this beginning retained earnings balance for 20X2 be stated, assuming that comparative financial statements were prepared? Assume that the beginning retained earnings balance (unadjusted) for 20X3 is $900,000 and that comparative financial statements are not prepared. At what adjusted amount should this beginning retained earnings balance be stated? (a) (b) Pasteur bought a truck on January 1, 20X1, for $98,000 with an $8,000 estimated salvage value and an estimated life of six years. The company debited the repair expense account and credited cash on the purchase date for the entire cost of the asset. The company uses straight line depreciation for such assets. During 20X3, Pasteur changed from the straight line method of depreciating its buildings to the sum-of-the-years'-digits method. The buildings had an original cost of $1,000,000 and were purchased on January 1, 20X0, with an estimated salvage value of $100,000. It is estimated that the buildings will have a total useful life of 25 years. The net income for 20X3 was computed using the new depreciation method. Pasteur has decided to switch from the direct write off method in accounting for bad debt expense to the percentage of sales approach. Assume that Pasteur has recognized bad debt expense as the receivables have actually become uncollectible in the following way. 2 20X2 $ From 20X2 sales From 20X3 sales 21,200 --- 0X3 $ 8,000 30,000 The controller estimates that an additional $43,600 will be charged off in 20X4: $7,600 applicable to 20X2 sales and $36,000 to 20X3 sales. (d) During the current year, the company sold $600,000 of goods on the installment basis. The cost associated with these goods sold is $450,000. The company inadvertently handled these sales and related costs as part of the regular sales transactions. Cash of $172,000, including a down payment of $60,000, was collected on these installment sales during the current year. Due to concern as to the collectibility of these sales, the installment method was considered appropriate