Question

Integrated Physicians & Associates, an investor-owned company,
had the following general ledger account balances at the end of
2015: Gross patient service revenue (total charges) Contractual
discounts and allowances to third-party payers Charges for charity
(indigent) care Estimated provision for bad debts $975,000 250,000
100,000 50,000 a. Construct the revenue section of Integrated
Physicians & Associates’ income statement for the year ended
December 31, 2015. Suppose the 2015 contractual discounts and
allowances balance reported above is understated by $50,000. In
other words, the correct balance should be $300,000. Assuming a 40
percent income tax rate, what would be the effect of the
misstatement on Integrated Physicians & Associates’ 2015
reported: 1. Net patient service revenue? 2. Total expenses,
including income tax expense? 3. Net income? For each item (1–3),
indicate whether the balance is overstated, understated, or not
affected by the misstatement. If overstated or understated,
indicate by how much

Answer 1

1. a. Calculation of net patient service revenue

Gross patient service revenue	$975,000
Less :Contractual discounts and allowances to third party payers	$250,000
Net Revenue	$725,000

b. Calculation of Overstatement/Understatement of  net patient service revenue :

Gross patient service revenue	$975,000
Less :Correct Contractual discounts and allowances to third party payers	$300,000
Net Revenue	$675,000

There is a overstatement of $ 50,000 ($ 675,000 - $ 725,000)

2. Calculation of total expenses:

a. Before considering misstatement

Contractual discounts and allowances to third party payers	$250,000
Charity expense	$100,000
Estimated provision for bad debts	$50,000
Total expenses before recognising misstatement	$ 400,000

b. After considering misstatement

Corrected Contractual discounts and allowances to third party payers	$300,000
Charity expense	$100,000
Estimated provision for bad debts	$50,000
Total expenses before recognising misstatement	$ 450,000

Total expenses (excluding income tax expense) are understated by $50,000

c. Calculation of Income tax Expense

Before considering misstatement = $975,000-$400,000(Total expenses) = $575,000*40% = $ 230,000

After considering misstatement =  $975,000-$450,000(Total expenses) = $525,000*40% = 210,000

Income tax expense is overstated by $20,000

Total expenses including Income tax expenses is overstated by $ 70,000

3. Calculation of Net Income

Net income before recognising misstatement = $975,000-$400,000(Total expenses) = $575,000

Net income after recognising misstatement = $975,000-$450,000(Total expenses) = $525,000

Net income is overstated by $50,000