Question

Question 5

Assume Deloitte & Touche, the accounting firm, advises Deep Sea Seafood that their financial statements must be changed to confirm with GAAP. At December 31, 2016, Deep Sea Seafood accounts include the following:

Cash	$51,000
Short-term trading investments, at cost	19,000
Accounts receivable	37,000
Inventory	61,000
Prepaid expenses	14,000
Total current assets	$182,000
Accounts payable	$62,000
Other current liabilities	41,000
Total current liabilities	$103,000

Deloitte & Touche advised Deep Sea Seafood that:

•     Cash includes $20,000 that is deposited in a compensating balance account that is tied up until

2018.

•     The fair value of the short-term trading investments is $17,000. Deep Sea Seafood purchased

the investments a couple of weeks ago.

      Deep Sea Seafood has been using the direct write-off method to account for uncollectible

receivables. During 2016, Deep Sea Seafood wrote off bad receivables of $7,000. Deloitte &

Touche determines that bad debt expense for the year should be 2.5% of sales revenue, which

totaled $600,000 in 2016.

•     Deep Sea Seafood reported net income of $92,000 in 2016.

1.    Restate Deep Sea Seafood’s current accounts to conform to GAAP.
2.    Compute Deep Sea Seafood’s current ratio and acid-test ratio before and after your corrections.
3.    Determine Deep Sea Seafood’s correct net income for 2016.

Answer 1

Answer-