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 started business on April 1, 2020, 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 tax:

2. A relatively small number of machines have been shipped on consignment. These transactions were recorded as ordinary sales and billed in this way, with the gross profit on each sale 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:

The sales price was determined by adding 30% to cost. Assume that the consigned machines are sold the following year.

3. On March 30, 2022, two machines were shipped to a customer on a cash on delivery basis. The sale was not entered until April 5, 2022, when $6,100 cash was received. The machines were not included in the inventory at March 31, 2022. (Title passed on March 30, 2022.)

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 tax and the bonus. The bonuses have never been recorded or paid.

6. Bad debts have been recorded on a direct write-off 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 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 was as follows:

8. Commissions on sales have been entered when paid. Commissions payable on March 31 of each year were as follows:

Instructions

a. Present a schedule showing the revised income before income tax for each of the years ended March 31, 2021, 2022, and 2023. 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, 2023. Disregard corrections of income tax.

Transcribed Image Text:

Year Ended March 31 2021 2022 2023 Income Before Taxes $ 71,600 111,400 103,580