The Ingalls Corporation is in the process of negotiating a loan for expansion purposes. The books and records have never been audited, and the bank has requested that an audit be performed. Ingalls has prepared the following comparative financial statements for the years ended December 31, 2008 and 2007:

During the course of the audit, the following additional facts were determined:
1. An analysis of collections and losses on accounts receivable during the past two years indicates a drop in anticipated losses because of bad debts. After consultation with management, it was agreed that the loss experience rate on sales should be reduced from the recorded 2% to 1%, beginning with the year ended December 31, 2008.
2. An analysis of the available-for-sale securities revealed that this portfolio consisted entirely of short-term investments in marketable equity securities that were acquired in 2007. The total market valuation for these investments as of the end of each year was as follows: December 31, 2007'$81,000; December 31, 2008'$62,000.
3. The merchandise inventory at December 31, 2007 was overstated by $4,000 and the merchandise inventory at December 31, 2008 was overstated by $6,100.
4. On January 2, 2007, equipment costing $12,000 (estimated useful life of 10 years and residual value of $1,000) was incorrectly charged to Operating Expenses. Ingalls records depreciation via the straight-line method. In 2008, fully depreciated equipment (with no residual value) that originally cost $17,500 was sold as scrap for $2,500. Noble credited the proceeds of $2,500 to Property and Equipment.
5. An analysis of 2007 operating expenses revealed that Ingalls charged to expense a three-year insurance premium of $2,700 on January 15, 2007.
Required
1. Prepare the journal entries to correct the books at December 31, 2008. The books for 2008 have not been closed. Ignore income taxes.
2. Prepare a schedule showing the computation of corrected net income for the years ended December 31, 2008 and 2007, assuming that any adjustments are to be reported on comparative statements for the two years. The first items on your schedule should be the net income for each year. Ignore income taxes. (Do not prepare financialstatements.)

Transcribed Image Text:

Balance Sheet As of December 31 2008 2007 Assets Current assets Cash Accounts receivable Allowance for uncollectible accounts Available-for-sale securities Merchandise inventory $163,000 392,000 (37,000) 78,000 207,000 803,000 $ 82,000 296,000 (18,000) 78,000 202,000 640,000 Total current assets Fixed assets Property, plant, and equipment Accumulated depreciation 167,000 169,500 121600 106,400) Total fixed assets Total assets 45,400 $848,400 63,100 $703,100 Liabilities and Stockholders' Equity Liabilities Accounts payable S121.400 S196,100 Stockholders equity Common stock, par value $10, authorized 50,000 shares, issued 260,000 467,000 727,000 $848,400 and outstanding 20,000 shares 260,000 247,000 507,000 $703,100 Retained earnings Total stockholders' equity Total liabilities and stockholders equity Statement of Income For the Years Ended December 31 2008 2007 $900,000 (395,000 Sales Cost of sales Gross profit Operating expenses Administrative expenses $1,000,000 -(430,000) 570,000 210,000 140,000 (350,000) S 220,000 505,000 205,000 05,000 (310,000) $195,000 Net income