A new client of yours has prepared the following condensed income statement for the second quarter of 2015.Sales revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $280,000Less: Sales returns and allowances . . . . . . . . . . . . . . . . . . . . . . . (24,000)Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $256,000Cost of sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145,000Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $111,000Selling, general, and administrative . . . . . . . . . . . . . . . . . . . . . . 41,000Net income before taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 70,000Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,000Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 54,000As part of your review engagement, you have noted the following related to the secondquarter income:1. Sales revenue and cost of sales were reduced by $15,000 and $9,000, respectively. These adjustments reflect the impact of incorrectly recording in the first quarter of 2015 a sale that should have been recorded in 2014.2. The reported cost of sales also includes $10,000 representing the annual amount of 2014 inventory, which was written off at year-end 2014, due to unrecorded shrinkage such as theft, damage, etc. Typically, shrinkage adds another 2% to cost of sales.3. The inventory shrinkage represents the annual amount of inventory that is typically written off at year-end, due to unrecorded shrinkage such as theft, damage, etc.4. The cost of sales is based on the LIFO inventory method, and gross profit percentages in the second quarter are higher than normal due to an unexpected inventory liquidation traceable to a strike at a major supplier’s manufacturing facility. Although 11,000 of the supplier’s units were sold during the quarter, the company was only able to purchase 8,000 units. The units liquidated had a cost of $7.00 per unit. The strike ended shortly after the end of the second quarter, liquidated units were replaced at a unit cost of $9.00, and there is no expectation of a LIFO liquidation issue at year-end.5. Selling, general, and administrative costs include the following: a. $12,600 for a health care insurance premium covering the second and third quarters of the current year. b. Contract research costs of $21,000 covering a project that is expected to benefit the company through mid-2016. c. $6,700 representing the annual budget for expenses related to a sales convention that management may attend. 6. Ignoring any corrections suggested by the above data, the company had pretax amounts as follows. The first quarter of 2015 reported a pretax loss of $48,000 and no tax benefit was recognized. At the end of the first quarter of 2015, management forecasted pretax income of $100,000 for the balance of the year. At the end of the second quarter of 2015, management forecasted pretax income of $78,000 for the balance of the year. 7. Ignoring any corrections suggested by the above data, prior to 2015 the company reported a pretax loss of $50,000 in 2013 and a $7,500 tax benefit assuming ‘‘more likely than not’’ that there would be adequate income in 2014. The company reported pretax income of $20,000 in 2014 and no related tax expense since the loss in 2013 offset the 2014 income. At the end of 2014, the company anticipated future ‘‘more likely than not’’ pretax income of $30,000. 8. The statutory tax rate since 2013 has been as follows on pretax income: 15% on the first $50,000, 25% on the next $25,000, 30% on the next $25,000, and 35% on all remaining income. Prepare a corrected condensed income statement for the second quarter of 2015.
A new client of yours has prepared the following condensed income statement for the second quarter of 2015.
Sales revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $280,000
Less: Sales returns and allowances . . . . . . . . . . . . . . . . . . . . . . . (24,000)
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $256,000
Cost of sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145,000
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $111,000
Selling, general, and administrative . . . . . . . . . . . . . . . . . . . . . . 41,000
Net income before taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 70,000
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,000
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 54,000
As part of your review engagement, you have noted the following related to the secondquarter income:
1. Sales revenue and cost of sales were reduced by $15,000 and $9,000, respectively. These adjustments reflect the impact of incorrectly recording in the first quarter of 2015 a sale that should have been recorded in 2014.
2. The reported cost of sales also includes $10,000 representing the annual amount of 2014 inventory, which was written off at year-end 2014, due to unrecorded shrinkage such as theft, damage, etc. Typically, shrinkage adds another 2% to cost of sales.
3. The inventory shrinkage represents the annual amount of inventory that is typically written off at year-end, due to unrecorded shrinkage such as theft, damage, etc.
4. The cost of sales is based on the LIFO inventory method, and gross profit percentages in the second quarter are higher than normal due to an unexpected inventory liquidation traceable to a strike at a major supplier’s manufacturing facility. Although 11,000 of the supplier’s units were sold during the quarter, the company was only able to purchase 8,000 units. The units liquidated had a cost of $7.00 per unit. The strike ended shortly after the end of the second quarter, liquidated units were replaced at a unit cost of $9.00, and there is no expectation of a LIFO liquidation issue at year-end.
5. Selling, general, and administrative costs include the following:
a. $12,600 for a health care insurance premium covering the second and third quarters of the current year.
b. Contract research costs of $21,000 covering a project that is expected to benefit the company through mid-2016.
c. $6,700 representing the annual budget for expenses related to a sales convention that management may attend.
6. Ignoring any corrections suggested by the above data, the company had pretax amounts as follows. The first quarter of 2015 reported a pretax loss of $48,000 and no tax benefit was recognized. At the end of the first quarter of 2015, management
7. Ignoring any corrections suggested by the above data, prior to 2015 the company reported a pretax loss of $50,000 in 2013 and a $7,500 tax benefit assuming ‘‘more likely than not’’ that there would be adequate income in 2014. The company reported pretax income of $20,000 in 2014 and no related tax expense since the loss in 2013 offset the 2014 income. At the end of 2014, the company anticipated future ‘‘more likely than not’’ pretax income of $30,000.
8. The statutory tax rate since 2013 has been as follows on pretax income: 15% on the first $50,000, 25% on the next $25,000, 30% on the next $25,000, and 35% on all remaining income.
Prepare a corrected condensed income statement for the second quarter of 2015.
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