Brown Inc. was organized in late 2012 to manufacture and sell hosiery. At the en
ID: 2447392 • Letter: B
Question
Brown Inc. was organized in late 2012 to manufacture and sell hosiery. At the end of its fourth year of operation, the company has been fairly successful, as indicated by the following reported net incomes.
2012
$140,000
Includes a $10,000 increase because of change in bad debt experience rate.
2013
160,000
Includes extraordinary gain of $30,000
2014
205,000
2015
276,000
The company has decided to expand operations and has applied for a sizable bank loan. The bank officer has indicated that the records should be audited and presented in comparative statements to facilitate analysis by the bank. Brown Inc therefore hired the auditing firm of Check & Doublecheck Co. and has provided the following additional information.
1. In early 2013, Brown Inc. changed its estimate from 2% of sales to 1% on the amount of bad debt expense to be charged to operations. Bad debt expense for 2012, if a 1% rate had been used, would have been $10,000. The company therefore restated its net income for 2012.
2. In 2015, the auditor discovered that the company had changed its method of inventory pricing from LIFO to FIFO. The effect on the income statement for the previous years is as follows.
2012
2013
2014
2015
Net income unadjusted—LIFO basis
$140,000
160,000
205,000
276,000
Net income unadjusted—FIFO basis
155,000
165,000
215,000
260,000
Difference
15,000
5,000
10,000
(16,000)
3. In 2015, the auditor discovered that the company incorrectly overstated the ending inventory (under both LIFO and FIFO) by $14,000 in 2014.
Instructions:
1. Prepare all necessary entries to record these determinations.
2. Prepare comparative income statements for Brown Inc. for the years 2012 to 2015, starting with income before extraordinary items. (Ignore income tax considerations.)
2012
$140,000
Includes a $10,000 increase because of change in bad debt experience rate.
2013
160,000
Includes extraordinary gain of $30,000
2014
205,000
2015
276,000
Explanation / Answer
Brown Inc. was organized in late 2012 to manufacture and sell hosiery. At the en
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