P5-65A (L earn i ng Obj ec tiv es 1 , 4 , 7: A pp ly G AA P f or shor t-t er m i n v es tm en t s an

P5-65A (Learning Objectives 1, 4, 7: Apply GAAP for short-term investments and uncollectible receivables; evaluate liquidity through ratios) Assume Adams & Murray, the accounting firm, advises Pappadeaux Seafood that its financial statements must be changed to conform to GAAP. At December 31, 2012, Pappadeaux’s accounts include the following:

 

 

 

Cash………………………………………………………………………….

$  59,000

Short-term investment in trading securities, at cost …………..

27,000

Accounts  receivable……………………………………………………..

37,000

Inventory……………………………………………………………………

60,000

Prepaid     expenses  …………………………………………………………

17,000

Total   current   assets ………………………………………………….

$200,000

Accounts     payable   ………………………………………………………..

$  61,000

Other  current  liabilities  ………………………………………………..

36,000

Total  current  liabilities ……………………………………………..

$  97,000

 

 

 

 

The accounting firm advised Pappadeaux of the following:

▶ Cash includes $18,000 that is deposited in a compensating balance account that is tied up until 2014.

▶  The market value of the trading securities is $13,000. Pappadeaux purchased the investments

a couple of weeks ago.

▶ Pappadeaux has been using the direct write-off method to account for uncollectible receiv- ables. During 2012, Pappadeaux wrote off bad receivables of $8,000. Adams & Murray determines that uncollectible-account expense should be 3% of service revenue, which totaled

$590,000 in 2012. The aging of Pappadeaux’s receivables at year-end indicated uncollectibles of $9,700.

▶ Pappadeaux reported net income of $90,000 in 2012.

▶ Requirements

1.    Restate Pappadeaux’s current accounts to conform to GAAP. (Challenge)

2. Compute Pappadeaux’s current ratio and quick (acid-test) ratio both before and after your corrections.

3. Determine Pappadeaux’s correct net income for 2012. (Challenge)

 

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