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Question 5: Assume Deloitte & Touche, the accounting firm, advises Deep Sea Seafood that their financial statements must be changed to confirm with GAAP. At
Question 5:
Assume Deloitte & Touche, the accounting firm, advises Deep Sea Seafood that their financial statements must be changed to confirm with GAAP. At December 31, 2016, Deep Sea Seafood accounts include the following:
Cash | $51,000 |
Short-term trading investments, at cost | 19,000 |
Accounts receivable | 37,000 |
Inventory | 61,000 |
Prepaid expenses | 14,000 |
Total current assets | $182,000 |
Accounts payable | $62,000 |
Other current liabilities | 41,000 |
Total current liabilities | $103,000 |
Deloitte & Touche advised Deep Sea Seafood that:
- Cash includes $20,000 that is deposited in a compensating balance account that is tied up until 2018.
- The fair value of the short-term trading investments is $17,000. Deep Sea Seafood purchased the investments a couple of weeks ago.
- Deep Sea Seafood has been using the direct write-off method to account for uncollectible receivables. During 2016, Deep Sea Seafood wrote off bad receivables of $7,000. Deloitte & Touche determines that bad debt expense for the year should be 2.5% of sales revenue, which totaled $600,000 in 2016.
- Deep Sea Seafood reported net income of $92,000 in 2016.
Requirements
- Restate Deep Sea Seafoods current accounts to conform to GAAP.
- Compute Deep Sea Seafoods current ratio and acid-test ratio before and after your corrections.
- Determine Deep Sea Seafoods correct net income for 2016.
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