The top managers of Whelan Gift Stores seek the counsel of Ernst & Young, the accounting firm, and learn that Whelan must make some changes to bring its financial statements into conformity with IFRS. At December 31, 2017, Whelan Gift Stores accounts include the following:
Cash.......................................................................................................... $ 23,000
Short-term trading investments................................................................... 24,000
Accounts receivable.................................................................................... 54,000
Inventory.................................................................................................... 45,000
Prepaid expenses........................................................................................ 17,000
Total current assets................................................................................. $163,000
Accounts payable....................................................................................... 46,000
Other current liabilities.............................................................................. 69,000
Total current liabilities........................................................................... $115,000
As the accountant from Ernst & Young, you draw the following conclusions:
• Cash includes $6,000 that is deposited in a restricted account that will be tied up until
2019.
• Whelan Gift Stores did not estimate their uncollectible accounts but rather wrote them off when they found out that the customer could not pay them. During 2017, the company wrote off bad receivables of $4,000. Ernst & Young determines that bad debt expense for 2017 should be $9,000 based on the allowance method.
• Whelan Gift Stores reported net income of $81,000 for 2017.
Requirements
1. Restate all current accounts to conform to IFRS.
2. Compute Whelan Gift Stores' current ratio and acid-test ratio both before and after your corrections.
3. Determine Whelan Gift Stores' correct net income for 2017.
4. How does using the allowance method to estimate uncollectible accounts benefit the investors and creditors?