Question

You have been asked by a client to review the records of Roberts 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 information.

1. Roberts Company commenced business on April 1, 2015, 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

2016 \( 71,600

2017 111,400

2018 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:

2016 \)6,500

2017 none

2018 5,590

Sales price was determined by adding 25% to cost. Assume that the consigned machines are sold the following year.

3. On March 30, 2017, two machines were shipped to a customer on a C.O.D. basis. The sale was not entered until April 5, 2017, when cash was received for \(6,100. The machines were not included in the inventory at March 31, 2017. (Title passed on March 30, 2017.)

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 books and warranty costs were as follows.

Year Ended March 31 Sales Warranty Expense for Sales Made in

2016 2017 2018 Total

2016 \) 940,000 \(760 \) 760

2017 1,010,000 360 \(1,310 1,670

2018 1,795,000 320 1,620 \)1,910 3,850

Bad Debts Incurred on Sales Made in Bad Debt Expense 2016 2017 2018 Total Based on 1% of Receivables 2016 \(750 \) 750 \(2,334 2017 800 \) 520 1,320 2,557 2018 350 1,800 \(1,700 3,850 4,458

5. Bad debts have been recorded on a direct write-off basis. Experience of similar enterprises indicates that losses will approximate 1% of receivables. Bad debts written off were:

6. The bank deducts 6% on all contracts financed. Of this amount, ½% is placed in a reserve to the credit of Roberts Company that is refunded to Roberts as finance contracts are paid in full. (Thus, Roberts should have a receivable for these payments and should record revenue when the net balance is remitted each year.) The reserve established by the bank has not been reflected in the books of Roberts. The excess of credits over debits (net increase) to the reserve account with Roberts on the books of the bank for each fiscal year were as follows. 2016 \) 3,000 2017 3,900 2018 5,100 \(12,000

7. Commissions on sales have been entered when paid. Commissions payable on March 31 of each year were as follows. 2016 \)1,400 2017 900 2018 1,120

8. A review of the corporate minutes reveals the manager is entitled to a bonus of 1% of the income before deducting income taxes and the bonus. The bonuses have never been recorded or paid.

Instructions

(a) Present a schedule showing the revised income before income taxes for each of the years ended March 31, 2016, 2017, and 2018. (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, 2018. Disregard correction of income taxes.

Short answer

The required schedule of revised net income and journal entry is passed.

Step-by-step solution

Preparation of the schedule

Roberts Company

Schedule of revised net income

For the year ended March 31, 2013, 2014 and 2015

Particulars

Computations

Summary

	2013	2014	2015	2013	2014	2015
1 Earnings before income as reported				$71,600	$111,400	$103,580
2 Elimination of profit on consignments:
Billed amount	$6,500		$5,590
At 125% of cost	125%		125%
Cost	5,200		4,472
Profit Error	1,300	$1,300	1,118	-1,300	1,300	-1,118
3 For correct of COD sale					6,100	-6,100
4 Adjustment of warrant expense
Sales per books	940,000	1,010,000	1,795,000
Correction for consignments	-6,500	6,500	-5,590
Correction for COD Sale		6,100	-6,100
Correction sales	933,500	1,022,600	1,783,310
Normal warranty expense one-half of 1%	4,668	5,113	8,917
Less: Cost charged to expense	-760	-1,670	-3,850
Additional Expense	3,908	3,443	5,067	-3,908	-3,443	-5,067
5 Bad debts adjustments:
Normal bad debts expense one quarter of 1%	2,334	2,557	4,458
Less: Previous write off	-750	-1,320	-3,850
Additional expense	$1,584	$1,237	$608	-1,584	-1,237	-608
6 Adjustments for contract financing				3,000	3,900	5,100
7 Adjustments for commission				-1,400	500	-220
				66,409	118,521	95,567
Adjustment for bonus, 1% of income before taxes and bonus				-664.1	-1,185.2	-955.7
Income before income taxes				$65,745	$117,335	$94,612

Journal entries

Journal entries

S no.	Accounts titles and explanation	Debit ($)	Credit ($)
1.	Sales	$12,090
	Accounts Receivables		$12,090
	Consignment Inventory	9,672
	Cost of goods sold		9,672
2.	Accounts Receivables	6,100
	Sales		6,100
3	Warranty Expenses	12,445
	Allowance for warranty expenses		12,445
	(3,745,000*0.5% - 6,280 = 12,445)
4	Bad Debts Expenses	3,443
	Allowances for bad debts		3,443
	0.25% * 3,745,000 – 5,920 = 3,443
5	Accounts receivables	12,000
	Finance charges reversed		12,000
6	Commission Expenses	3,420
	Commission payable		3,420
7	Bonus Expenses	$2,886
	Bonus Payable		$2,886