(Comprehensive Accounting Change and Error Analysis Problem) Botticelli 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 $140,000a 2014 $205,000

2013 160,000b 2015 276,000

aIncludes a $10,000 increase because of change in bad debt experience rate.

bIncludes extraordinary gain of $30,000.

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. Botticelli Inc. therefore hired the auditing firm of Check & Doublecheck Co. and has

provided the following additional information.

1. In early 2013, Botticelli 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 statements for the previous years is as follows

Net income unadjustedLIFO basis $140,000 $160,000 $205,000 $276,000

Net income unadjustedFIFO basis 155,000 165,000 215,000 260,000

$ 15,000 $ 5,000 $ 10,000 $ (16,000)

3. In 2015, the auditor discovered that:

(a) The company incorrectly overstated the ending inventory (under both LIFO and FIFO) by

$14,000 in 2014.

(b) A dispute developed in 2013 with the Internal Revenue Service over the deductibility of entertainment

expenses. In 2012, the company was not permitted these deductions, but a tax settlement

was reached in 2015 that allowed these expenses. As a result of the courts finding, tax

expenses in 2015 were reduced by $60,000.

Instructions

(a) Indicate how each of these changes or corrections should be handled in the accounting records.

(Ignore income tax considerations.)

(b) Present comparative income statements for the years 2012 to 2015, starting with income before

extraordinary items. (Ignore income tax considerations.)