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    Revised income before income taxes

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    I am having a very rough time with this problem, there is no example in the book and I am having trouble of where to even start. For the attached problem, I must:

    (a.) Present a schedule showing the revised income before income taxes for each of the years ended March 31, 2006, 2007, and 2008. Make computations to the nearest whole dollar.

    (b.) 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, 2008. Disregard correction of income taxes.

    You have been asked by a client to review the records of Larry Landers 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:

    1. Landers Company commenced business on April 1, 2005, 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

    2006 $71,600
    2007 111,400
    2008 103,580

    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:

    2006 $6,500
    2007 none
    2008 5,590

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

    3. On March 30, 2007, two machines were shipped to a customer on a C.O.D. basis. The sale was not entered until April 5, 2007, when cash was received for $6,100. The machines were not included in the inventory at March 31, 2007. (Title passed on March 30, 2007.)
    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 ½ of 1% of sales. The company has charged an expense account for warranty costs incurred.

    Sales per book and warranty costs were as follows:

    Year ended Warranty Expense for Sales Made In:
    March 31 Sales 2006 2007 2008 Total
    2006 $ 940,000 $760 $ 760
    2007 1,010,000 360 $1,310 1,670
    2008 1,795,000 320 1,620 1,910 3,850

    5. A review of the corporate minutes reveals the manager is entitled to a bonus of ½ of 1% of the income before deducting income taxes and the bonus. The bonuses have never been recorded or paid.
    6. Bad debts have been recorded on a direct write-off basis. Experience of similar enterprises indicates that losses will approximate ¼ of 1% of sales. Bad debts written off were:

    Bad Debts Incurred on Sales Made In:
    2006 2007 2008 Total
    2006 $750 $750
    2007 800 $520 1,320
    2008 350 1,800 1,700 3,850

    7. The bank deducts 6% on all contracts financed. Of this amount, ½% is placed in a reserve to the credit of Landers Company that is refunded to Landers as finance contracts are paid in full. The reserve established by the bank has not been reflected in the books of Landers. The excess of credits over debits (net increase) to the reserve account with Landers on the books of the bank for each fiscal year were as follows:

    2006 $3,000
    2007 3,900
    2008 5,100

    8. Commissions on sales have been entered when paid. Commissions payable on March 31 of each year were as follows:

    2006 $1,400
    2007 800
    2008 1,120

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    Solution Preview

    Please see the attached file


    Schedule of Revised Net Income
    For the Years Ended March 31, 2006, 2007, and 2008
    Increases (Decreases) in Income
    2006 2007 2008 2006 2007 2008
    1 Net income as reported $71,600 $111,400 $103,580
    2 Elimination of profit on consignments:
    Billed $6,500 $5,590
    at 130% of cost ÷ 130% ÷ 130%
    Cost $5,000 $4,300
    Profit error $1,500 $1,290 -1,500 1,500 -1,290
    3 To correct C.O.D. sale 6,100 -6,100
    4 Adjustment of warranty expense:
    Sales per books $940,000 $1,010,000 $1,795,000
    Correction for ...

    Solution Summary

    The solution explains how to prepare a schedule of revised income before income taxes and the necessary journal entries to correct the books.