Question: You have been asked by a client to review the

You have been asked by a client to review the records of Inteq Corporation, a small manufacturer of precision tools and machines that follows ASPE. Your client is interested in buying the business, and arrangements were made for you to review the accounting records. Your examination reveals the following:
1. Inteq Corporation commenced business on April 1, 2008, 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
2009 ................ $71,600
2010 ................ 111,400
2011 ................ 103,580
2. A relatively small number of machines have been shipped on consignment. These transactions have been recorded as ordinary sales and billed in this way, with the gross profit on each sale being recognized when the machine was shipped. On March 31 of each year, the amounts for machines billed and in the hands of consignees were as follows:
2009 ................$6,500
2010 ................ none
2011 ................ 5,590
The sales price was determined by adding 30% to cost. Assume that the consigned machines are sold the following year.
3. On March 30, 2010, two machines were shipped to a customer on a C.O.D. basis. The sale was not entered until April 5, 2010, when $6,100 cash was received. The machines were not included in the inventory at March 31, 2010. (Title passed on March 30, 2010.)
4. All machines are sold subject to a five-year warranty. It is estimated that the expense ultimately to be incurred in connection with the warranty will amount to 0.5% of sales. The company has charged an expense account for actual warranty costs incurred. Sales per books and warranty costs were as follows:
5. A review of the corporate minutes reveals that the manager is entitled to a bonus of 0.5% 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 writeoff basis. Experience of similar enterprises indicates that losses will approximate 0.25% of sales. Bad debts written off and expensed were as follows:
7. The bank deducts 6% on all contracts that it finances. Of this amount, 0.5% is placed in a reserve to the credit of Inteq Corporation and is refunded to Inteq as financed contracts are paid in full. The reserve established by the bank has not been reflected in Inteq’s books. On the books of the bank for each fiscal year, the excess of credits over debits (the net increase) to the reserve account for Inteq were as follows:
2009........... $ 3,000
2010 .......... 3,900
2011 .......... 5,100
(a) Present a schedule showing the revised income before income taxes for each of the years ended March 31, 2009, 2010, and 2011. Make calculations to the nearest dollar.
(b) Prepare the journal entry or entries that you would give the bookkeeper to correct the books. Assume that the books have not yet been closed for the fiscal year ended March 31, 2011. Disregard corrections of income taxes.

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