You have been asked by a client to review the records of Inteq Corporation, a small manufacturer of precision tools and machines that follows ASPE. Your client is interested in buying the business, and arrangements were made for you to review the accounting records. Your examination reveals the following.

1. Inteq Corporation commenced business on April 1, 2011, 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 tax:

Year Ended March 31 Income Before Taxes

2012 ..............................................$ 71,600

2013 ..............................................111,400

2014 ..............................................103,580

2. A relatively small number of machines have been shipped on consignment. These transactions have been recorded as ordinary sales and billed in this way, with the gross profit on each sale being recognized when the machine was shipped. On March 31 of each year, the amounts for machines billed and in the hands of consignees were as follows:

2012 ..............................................$6,500

2013 .............................................. none

2014 .............................................. 5,590

The sales price was determined by adding 30% to cost. Assume that the consigned machines are sold the following year.

3. On March 30, 2013, two machines were shipped to a customer on a C.O.D. basis. The sale was not entered until April 5, 2013, when $6,100 cash was received. The machines were not included in the inventory at March 31, 2013. (Title passed on March 30, 2013.)

4. All machines are sold subject to a five-year warranty. It is estimated that the expense ultimately to be incurred in connection with the warranty will amount to 0.5% of sales. The company has charged an expense account for actual warranty costs incurred. Sales per books and warranty costs were as follows:

5. A review of the corporate minutes reveals that the manager is entitled to a bonus of 0.5% of the income before deducting income tax and the bonus. The bonuses have never been recorded or paid.
6. Bad debts have been recorded on a direct writeoff basis. Experience of similar enterprises indicates that losses will approximate 0.25% of sales. Bad debts written off and expensed were as follows:

7. The bank deducts 6% on all contracts that it finances. Of this amount, 0.5% is placed in a reserve to the credit of Inteq Corporation and is refunded to Inteq as financed contracts are paid in full. The reserve established by the bank has not been reflected in Inteq's books. On the books of the bank for each fiscal year, the excess of credits over debits (the net increase) to the reserve account for Inteq were as follows:
2012 ................................... $ 3,000
2013 ................................... 3,900
2014 ................................... 5,100
$12,000
8. Commissions on sales have been entered when paid. Commissions payable on March 31 of each year were as follows:
2012 ........................$1,400
2013 ........................ 800
2014 ........................ 1,120
Instructions
(a) Present a schedule showing the revised income before income tax for each of the years ended March 31, 2012, 2013, and 2014. Make calculations to the nearest dollar.
(b) Prepare the journal entry or entries that you would give the bookkeeper to correct the books. Assume that the books have not yet been closed for the fiscal year ended March 31, 2014. Disregard corrections of income tax. (AICPA adapted)

Transcribed Image Text:

Actual Warranty Costs Incurred for Sales Made in Year Ended March 31 2012 2013 2014 Sales Total $760 1,670 ,795,000 2014 320 1,620 $1,910 3,850 940,000 2012 $760 ,010,000 2013 360 $1,310 Bad Debts Incurred on Sales Made in Total 2012$780s, 520$%1.700 $ 750 2013 800 520 2014 350 1,800 $1,700 1,320 3,850