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# How do you calculate the correct net income for Frazz Corporation?

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1. Frazz Corporation is a privately-held manufacturer of industrial equipment. For calendar year 2009, Frazz reported a net income before taxes of \$684,300. However, because of turnover in the accounting department, some errors were made. Given the following information, compute the correct net income before taxes for Frazz. Explain your answer.

-On March 31, 2009, Frazz paid \$48,000 rent in advance for a storage facility. The entire payment was debited to Rent Expense. The payment was for the period April 1, 2009 to March 31, 2010.

-On January 2, 2009, Frazz put in service new office furniture with a cost of \$26,000, and estimated salvage value of \$5,000. Estimated useful life of the furniture is 14 years, but the depreciation calculation (straight-line method) erroneously used 7 years.

-On December 30, 2009, Frazz shipped a custom-order machine to a customer, recording sales revenue of \$132,500, and COGS of \$98,700. The contract required installation and calibration by Frazz, which was completed January 20, 2010.

-Early in the year, Frazz began offering for sale a pre-paid three-year technical support plan for its equipment. Payments of \$60,000 were received for plan coverage during the year, and recorded as Fee Revenue. It is estimated that 14% of this amount was earned in 2009, with the rest relating to 2010 and 2011.

-During 2009, Frazz had outstanding an average of \$1,170,000 in bank loans, at an average rate of 6%. Interest payments relating to 2009 were made in the amount of \$37,300 and recorded as Interest Expense, but no other entries were made.

-At the beginning of 2009, Allowance for Bad Debts was \$37,800. Uncollectible accounts of \$32,000 were written off during the year, and charged to Bad Debt Expense. No other entries were made. It is estimated that the ending balance of the allowance should be \$40,400.

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1.Frazz Corporation is a privately-held manufacturer of industrial equipment. For calendar year 2009, Frazz reported a net income before taxes of \$684,300. However, because of turnover in the accounting department, some errors were made. Given the following information, compute the correct net income before taxes for Frazz. Explain your answer.

Starting net income = \$684,300

Ã¢â‚¬Â¢On March 31, 2009, Frazz paid \$48,000 rent in advance for a storage facility. The entire payment was debited to Rent Expense. The payment was for the period April 1, 2009 to March 31, 2010.

The amount paid is for 3months of 2010 also and that would not be a expense for 2009 under the matching concept.
3 months rent = 48,000/12 X 3 = 12,000
The entire amount was charged to expense. The expense should be 48,000-12,000=36,000
Net income will be higher by 12,000

Ã¢â‚¬Â¢On January 2, 2009, Frazz put in service new office furniture with a cost of \$26,000, and estimated salvage value of \$5,000. Estimated useful life of the furniture is 14 years, but the depreciation calculation (straight-line method) erroneously used 7 years.

The depreciation calculated earlier = (26,000-5,000)/7 = 3,000
Correct depreciation = (26,000-5,000)/14 = 1,500
The net income would be higher by 1,500

Ã¢â‚¬Â¢On December 30, 2009, Frazz shipped a custom-order machine to a customer, recording sales revenue of \$132,500, and COGS of \$98,700. The contract required installation and calibration by Frazz, which was completed January 20, 2010.

Since the installation and calibration was done in 2010, the sale was completed in 2010 and under the revenue recognition principle, revenue should be recognized in 2010.
The income from the sale = 132,500-98,700 = 33,800
The net income is now higher by 33,800. With the sale to be recorded in 2010, the net income for 2009 would be lower by 33,800

Ã¢â‚¬Â¢Early in the year, Frazz began offering for sale a pre-paid three-year technical support plan for its equipment. Payments of \$60,000 were received for plan coverage during the year, and recorded as Fee Revenue. It is estimated that 14% of this amount was earned in 2009, with the rest relating to 2010 and 2011.

What is earned this year only would be the revenue for 2009. Revenue for 2009 is 60,000 X 14% = 8,400
Revenue recorded in 2009 is 60,000
Net income for 2009 will be lower by 60,000-8,400 = 51,600

Ã¢â‚¬Â¢During 2009, Frazz had outstanding an average of \$1,170,000 in bank loans, at an average rate of 6%. Interest payments relating to 2009 were made in the amount of \$37,300 and recorded as Interest Expense, but no other entries were made.

Actual interest amount = 1,170,000 X 6% = 70,200
Interest expense recorded = 37,300
Extra interest expense = 32,900
Net income would be lower by 32,900

Ã¢â‚¬Â¢At the beginning of 2009, Allowance for Bad Debts was \$37,800. Uncollectible accounts of \$32,000 were written off during the year, and charged to Bad Debt Expense. No other entries were made. It is estimated that the ending balance of the allowance should be \$40,400.

Under the allowance method, the uncollectible cannot be charged to bad debt expense. They should be charged to allowance for bad debts.
(a) We would need to reverse the expense for 32,000. The net income would be higher by 32,000
(b) After the correction, the balance in allowance for bad debts account would be 37,800-32,000=5,800. Actual balance should be 40,400. We would need to record bad debt expense for 40,400-5,800=34,600 to make the allowance balance correct. Net income would be lower by 34,600
The net effect on net income = 34,600-32,000=2,600. The net income would be lower by 2,600

The correct net income would be