You have been asked by a client to review the records of Waterway Company, a small manufacturer of precision tools and machines. Your client is interested in buying the business, and arrangements have been made for you to review the accounting records. Your examination reveals the following information. 1. Waterway Company commenced business on April 1, 2018, and has been reporting on a fiscal year ending March 31. The company has never been audited, but the annual statements prepared by the bookkeeper reflect the following income before closing and before deducting income taxes.
| Year Ended March 31 | | Income Before Taxes |
| 2019 | | $80,192 |
| 2020 | | 124,768 |
| 2021 | | 116,010 |
2. A relatively small number of machines have been shipped on consignment. These transactions have been recorded as ordinary sales and billed as such. On March 31 of each year, machines billed and in the hands of consignees amounted to:
| 2019 | | $7,280 |
| 2020 | | none |
| 2021 | | 6,261 |
Sales price was determined by adding 25% to cost. Assume that the consigned machines are sold the following year. 3. On March 30, 2020, two machines were shipped to a customer on a C.O.D. basis. The sale was not entered until April 5, 2020, when cash was received for $6,832. The machines were not included in the inventory at March 31, 2020. (Title passed on March 30, 2020.) 4. All machines are sold subject to a 5-year warranty. It is estimated that the expense ultimately to be incurred in connection with the warranty will amount to 12 of 1% of sales. The company has charged an expense account for warranty costs incurred. Sales per books and warranty costs were as follows.
| | | | | Warranty Expense for Sales Made in |
| Year Ended March 31 | | Sales | | 2019 | | 2020 | | 2021 | | Total |
| 2019 | | $1,052,800 | | $851 | | | | | | $851 |
| 2020 | | 1,131,200 | | 403 | | $1,467 | | | | 1,870 |
| 2021 | | 2,010,400 | | 358 | | 1,814 | | $2,139 | | 4,311 |
5. Bad debts have been recorded on a direct write-off basis. Experience of similar enterprises indicates that losses will approximate 1% of receivables. Bad debts written off were:
| | | Bad Debts Incurred on Sales Made in | | | | |
| | | 2019 | | 2020 | | 2021 | | Total | | Bad Debt Expense Based on 1% of Receivables |
| 2019 | | $840 | | | | | | $840 | | $2,614 |
| 2020 | | 896 | | $582 | | | | 1,478 | | 2,863 |
| 2021 | | 392 | | 2,016 | | $1,904 | | 4,312 | | 4,993 |
6. The bank deducts 6% on all contracts financed. Of this amount, 12% is placed in a reserve to the credit of Waterway Company that is refunded to Waterway as finance contracts are paid in full. (Thus, Waterway should have a receivable for these payments and should record revenue when the net balance is remitted each year.) The reserve established by the bank has not been reflected in the books of Waterway. The excess of credits over debits (net increase) to the reserve account with Waterway on the books of the bank for each fiscal year were as follows.
| 2019 | | $3,360 |
| 2020 | | 4,368 |
| 2021 | | 5,712 |
| | | $13,440 |
7. Commissions on sales have been entered when paid. Commissions payable on March 31 of each year were as follows.
| 2019 | | $1,568 |
| 2020 | | 1,008 |
| 2021 | | 1,254 |
8. A review of the corporate minutes reveals the manager is entitled to a bonus of 1% of the income before deducting income taxes and the bonus. The bonuses have never been recorded or paid.
You have been asked by a client to review the records of Waterway Company, a small manufacturer of precision tools and machines. Your client is interested in buying the business, and arrangements have been made for you to review the accounting records. Your examination reveals the following information. 1. Waterway Company commenced business on April 1, 2018, and has been reporting on a fiscal year ending March 31. The company has never been audited, but the annual statements prepared by the bookkeeper reflect the following income before closing and before deducting income taxes. Year Ended March 31 2019 2020 2021 Income Before Taxes $80,192 124,768 116,010 2. A relatively small number of machines have been shipped on consignment. These transactions have been recorded as ordinary sales and billed as such. On March 31 of each year, machines billed and in the hands of consignees amounted to: 2019 2020 2021 $7,280 none 6,261 Sales price was determined by adding 25% to cost. Assume that the consigned machines are sold the following year. 3. On March 30, 2020, two machines were shipped to a customer on a C.O.D. basis. The sale was not entered until April 5, 2020, when cash was received for $6,832. The machines were not included in the inventory at March 31, 2020. (Title passed on March 30, 2020.) 4. All machines are sold subject to a 5-year warranty. It is estimated that the expense ultimately to be incurred in connection with the warranty will amount to 1 of 1% of sales. The company has charged an expense account for warranty costs incurred. Sales per books and warranty costs were as follows. Warranty Expense for Sales Made in Year Ended March 31 Sales 2019 2020 2021 Total 2019 $1,052,800 $851 $851 2020 1,131,200 403 $1,467 1,870 2021 2,010,400 358 1,814 $2,139 4,311 5. Bad debts have been recorded on a direct write-off basis. Experience of similar enterprises indicates that losses will approximate 1% of receivables. Bad debts written off were: Bad Debts Incurred on Sales Made in 2020 2021 2019 2020 2021 2019 $840 896 392 Total $840 1,478 4,312 Bad Debt Expense Based on 1% of Receivables $2,614 2,863 4,993 $582 2,016 $1,904 6. The bank deducts 5% on all contracts financed. Of this amount, -2% is placed in a reserve to the credit of Waterway Company that is refunded to Waterway as finance contracts are paid in full. (Thus, Waterway should have a receivable for these payments and should record revenue when the net balance is remitted each year.) The reserve established by the bank has not been reflected in the books of Waterway. The excess of credits over debits (net increase) to the reserve account with Waterway on the books of the bank for each fiscal year were as follows. 2019 2020 2021 $3,360 4,368 5,712 $13,440 7. Commissions on sales have been entered when paid. Commissions payable on March 31 of each year were as follows. 2019 2020 2021 $1,568 1,008 1,254 8. A review of the corporate minutes reveals the manager is entitled to a bonus of 1% of the income before deducting income taxes and the bonus. The bonuses have never been recorded or paid. Present a schedule showing the revised income before income taxes for each of the years ended March 31, 2019, 2020, and 2021. (Enter negative amounts using either a negative sign preceding the number e.g. -15,000 or parentheses e.g. (15,000). Round answers to the nearest whole dollar, e.g. 5,275.) WATERWAY COMPANY Schedule of Revised Net Income For the Years Ended March 31, 2019, 2020, and 2021 COMPUTATIONS 2020 SUMMARY Increases (Decreases) in Income 2020 2019 2021 2019 2021 1. Income before income taxes, as reported 2. Elimination of profit on consignments: Billed at 125% of cost Cost $ Profit error 3. To correct C.O.D. sale 4. Adjustment of warranty expense: Sales per books $ Correction for consignments Correction for C.O.D. sale J $ Corrected sales Normal warranty expense, one-half of 1% $ $ $ Less costs charged to expense $ Additional expense 5. Bad debt adjustments: Normal bad debt expense, one-quarter of 1% of sales $ Less previous write-offs Additional expense 6. Adjustment for contract financing 7. Adjustment for commissions 8. Adjustment for bonus, 1% of income before taxes and bonus Income before income taxes $L Prepare the journal entry or entries you would give the bookkeeper to correct the books. Assume the books have not yet been closed for the fiscal year ended March 31, 2021. Disregard correction of income taxes. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter o for the amounts. Round answers to the nearest whole dollar, e.g. 5,275.) No. Account Titles and Explanation Debit Credit 1. (To adjust for consignments treated as sales.) 2. (To adjust for C.O.D. sales not recorded.) 3. (To record accrued warranty expense.) (To set up allowance for uncollectible accounts.) 5. (To record finance charge reserve held by bank.) 6. (To adjust for accrued commissions.) (To set up accrued bonus payable to manager.) You have been asked by a client to review the records of Waterway Company, a small manufacturer of precision tools and machines. Your client is interested in buying the business, and arrangements have been made for you to review the accounting records. Your examination reveals the following information. 1. Waterway Company commenced business on April 1, 2018, and has been reporting on a fiscal year ending March 31. The company has never been audited, but the annual statements prepared by the bookkeeper reflect the following income before closing and before deducting income taxes. Year Ended March 31 2019 2020 2021 Income Before Taxes $80,192 124,768 116,010 2. A relatively small number of machines have been shipped on consignment. These transactions have been recorded as ordinary sales and billed as such. On March 31 of each year, machines billed and in the hands of consignees amounted to: 2019 2020 2021 $7,280 none 6,261 Sales price was determined by adding 25% to cost. Assume that the consigned machines are sold the following year. 3. On March 30, 2020, two machines were shipped to a customer on a C.O.D. basis. The sale was not entered until April 5, 2020, when cash was received for $6,832. The machines were not included in the inventory at March 31, 2020. (Title passed on March 30, 2020.) 4. All machines are sold subject to a 5-year warranty. It is estimated that the expense ultimately to be incurred in connection with the warranty will amount to 1 of 1% of sales. The company has charged an expense account for warranty costs incurred. Sales per books and warranty costs were as follows. Warranty Expense for Sales Made in Year Ended March 31 Sales 2019 2020 2021 Total 2019 $1,052,800 $851 $851 2020 1,131,200 403 $1,467 1,870 2021 2,010,400 358 1,814 $2,139 4,311 5. Bad debts have been recorded on a direct write-off basis. Experience of similar enterprises indicates that losses will approximate 1% of receivables. Bad debts written off were: Bad Debts Incurred on Sales Made in 2020 2021 2019 2020 2021 2019 $840 896 392 Total $840 1,478 4,312 Bad Debt Expense Based on 1% of Receivables $2,614 2,863 4,993 $582 2,016 $1,904 6. The bank deducts 5% on all contracts financed. Of this amount, -2% is placed in a reserve to the credit of Waterway Company that is refunded to Waterway as finance contracts are paid in full. (Thus, Waterway should have a receivable for these payments and should record revenue when the net balance is remitted each year.) The reserve established by the bank has not been reflected in the books of Waterway. The excess of credits over debits (net increase) to the reserve account with Waterway on the books of the bank for each fiscal year were as follows. 2019 2020 2021 $3,360 4,368 5,712 $13,440 7. Commissions on sales have been entered when paid. Commissions payable on March 31 of each year were as follows. 2019 2020 2021 $1,568 1,008 1,254 8. A review of the corporate minutes reveals the manager is entitled to a bonus of 1% of the income before deducting income taxes and the bonus. The bonuses have never been recorded or paid. Present a schedule showing the revised income before income taxes for each of the years ended March 31, 2019, 2020, and 2021. (Enter negative amounts using either a negative sign preceding the number e.g. -15,000 or parentheses e.g. (15,000). Round answers to the nearest whole dollar, e.g. 5,275.) WATERWAY COMPANY Schedule of Revised Net Income For the Years Ended March 31, 2019, 2020, and 2021 COMPUTATIONS 2020 SUMMARY Increases (Decreases) in Income 2020 2019 2021 2019 2021 1. Income before income taxes, as reported 2. Elimination of profit on consignments: Billed at 125% of cost Cost $ Profit error 3. To correct C.O.D. sale 4. Adjustment of warranty expense: Sales per books $ Correction for consignments Correction for C.O.D. sale J $ Corrected sales Normal warranty expense, one-half of 1% $ $ $ Less costs charged to expense $ Additional expense 5. Bad debt adjustments: Normal bad debt expense, one-quarter of 1% of sales $ Less previous write-offs Additional expense 6. Adjustment for contract financing 7. Adjustment for commissions 8. Adjustment for bonus, 1% of income before taxes and bonus Income before income taxes $L Prepare the journal entry or entries you would give the bookkeeper to correct the books. Assume the books have not yet been closed for the fiscal year ended March 31, 2021. Disregard correction of income taxes. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter o for the amounts. Round answers to the nearest whole dollar, e.g. 5,275.) No. Account Titles and Explanation Debit Credit 1. (To adjust for consignments treated as sales.) 2. (To adjust for C.O.D. sales not recorded.) 3. (To record accrued warranty expense.) (To set up allowance for uncollectible accounts.) 5. (To record finance charge reserve held by bank.) 6. (To adjust for accrued commissions.) (To set up accrued bonus payable to manager.)
