Assume Deloitte & Touche, the accounting firm, advises Pappadeaux Seafood that Pappadeaux's financial statements must be changed to conform to GAAP. At December 31, 2014, Pappadeaux's accounts include the following:
Cash ........................................................................................................... $ 51,000
Short-term trading investments, at cost ...................................................... 19,000
Accounts receivable .................................................................................... 37,000
Inventory ................................................................................................... 61,000
Prepaid expenses ........................................................................................ 14,000
Total current assets ................................................................................. $182,000
Accounts payable ....................................................................................... $ 62,000
Other current liabilities .............................................................................. 41,000
Total current liabilities ............................................................................ $103,000
Deloitte & Touche advised Pappadeaux that:
• Cash includes $20,000 that is deposited in a compensating balance account that is tied up until 2016.
• The fair value of the short-term trading investments is $17,000. Pappadeaux purchased the investments a couple of weeks ago.
• Pappadeaux has been using the direct write-off method to account for uncollectible receivables. During 2014, Pappadeaux wrote off bad receivables of $7,000. Deloitte & Touche determines that bad debt expense for the year should be 2.5% of sales revenue, which totalled $600,000 in 2014.
• Pappadeaux reported net income of $92,000 in 2014.
Requirements
1. Restate Pappadeaux's current accounts to conform to GAAP.
2. Compute Pappadeaux's current ratio and acid-test ratio both before and after your corrections.
3. Determine Pappadeaux's correct net income for 2014.