P22-2 (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 unadjusted