Hiatt Textile Corporation is planning to expand its current plant facilities and is in the process of obtaining a loan at City Bank. The bank has requested audited financial statements. Hiatt has never been audited before. It has prepared the following comparative financial statements for the years ended December 31, 2011 and 2010.

The following facts were uncovered during the audit.
(a) On January 20, 2010, Hiatt had charged a 5-year fire insurance premium to expense. The total premium amounted to $15,500.
(b) Over the last two years, the amount of loss due to bad debts has steadily decreased. Hiatt has decided to reduce the amount of bad debt expense from 2% to 1.5% of sales, beginning with 2011. (A charge of 2% has already been made for 2011.)
(c) The inventory account (maintained on a periodic basis) has been in error the last two years. The errors were as follows:
2010: Ending inventory overstated by $37,750
2011: Ending inventory overstated by $49,500
(d) A machine costing $75,000, purchased on January 4, 2010, was incorrectly charged to operating expense. The machine has a useful life of 10 years and a residual value of $12,500. The straight-line depreciation method is used by Hiatt.
Instructions:
1. Prepare the journal entries to correct the books at December 31, 2011. The books for 2011 have not been closed. (Ignore income taxes.)
2. Prepare a schedule showing the computation of corrected net income for the years ended December 31, 2010 and 2011, assuming that any adjustments are to be reported on the comparative statements for the two years. Begin your schedule with the net income for each year. (Ignore incometaxes.)

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Hiatt Textile Corporation Comparative Balance Sheets December 31, 2011 and 2010 2011 2010 Assets Current assets Cash Accounts receivable Allowance for bad debts Inventory $ 602500 400,000 740,000 (45,000 505,000 $2,007,500 ,600,000 980,000 (92,500) 517,500 Total current assets Plant assets: Property, plant, and equipment $417500 423,750 304,000) 266.000 $13,500 157,750 $2,121,000 $757,750 Total plant assets Total assets Liabilities and Stockholders' Equity Liabilities Accounts payable 303,500 490,250 Stockholders equity. Common stock, par value $25: authorized, 30,000 shares issued and outstanding, 26.000 shares Retained earnings $ 650,000 650,000 617,500 $1,817,500 $,267.500 $2.121,000 $I,757,750 1,167.500 Total stockholders' equity Total liabilities and stockholders' equity Hiatt Textile Corporation Comparative Income Statements For the Years Ended December 31, 2011 and 2010 2011 2010 Sales Cost of goods sold Gross margin Operating expenses 52.500,000 $2250,000 987,500 $1.425.000 $,262,500 575,000 512,500 262,500 $ 875.000 775,000 550.000 487,500 .075.000 300,000 Net income