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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

  1. Restate Deep Sea Seafoods current accounts to conform to GAAP.
  2. Compute Deep Sea Seafoods current ratio and acid-test ratio before and after your corrections.
  3. Determine Deep Sea Seafoods correct net income for 2016.

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