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

The response to these questions is being evaluated on the basis of: understanding of concepts, computational correctness, thoughtfulness, and clarity. All necessary calculations must be clearly shown. Your response can be in either Word or Excel.

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.

#### Solution Summary

The solution explains how to calculate the correct net income in an attached Word document.

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