The following income statement, statement of cash flows, and additional information are available for PEK Company:
b. During the year, the company sold 250,000 units at $5 each. c. PEK uses the periodic FIFO method to value its inventory and the straight-line method to depreciate all of its long-term assets. d. During the year-end audit, it was discovered that a January 3, 2017, transaction for the lumpsum purchase of a mixing machine and a boiler was not recorded. The fair market values of the mixing machine and the boiler were $200,000 and $100,000, respectively. Each asset has an estimated useful life of ten years with no residual value expected. The purchase of the assets was financed by issuing a $270,000 five-year promissory note directly to the seller. Interest of 8% is paid annually on December 31.
1. Prepare a revised income statement and a revised statement of cash flows to take into account the omission of the entry to record the purchase of the two assets. (Hint: You will need to take into account any change in income taxes as a result of changes in any income statement items. Assume that income taxes are paid on December 31 of each year.) 2. Assume the same facts as in part (1), except that the company is considering the use of an accelerated method rather than the straight-line method for the assets purchased on January 3, 2017. All other assets would continue to be depreciated on a straight-line basis. Prepare a revised income statement and a revised statement of cash flows assuming that the company decides to use the accelerated method for these two assets rather than the straightline method, resulting in depreciation of $49,091 for 2017. Treat the answers in parts (3) and (4) as independent of the other parts. 3. Assume that PEK decides to use the LIFO method rather than the FIFO method to value its inventory and recognize cost of goods sold for 2017. Compute the effect (amount of increase or decrease) this would have on cost of goods sold, income tax expense, and net income. 4. Assume that PEK failed to record an estimate of bad debts for 2017. (Bad debt expense is normally included in ‘‘other expenses.’’) Before any adjustment, the balance in Allowance for Doubtful Accounts is $8,200. The credit manager estimates that 3% of the $800,000 of sales on account will prove to be uncollectible. Based on this information, compute the effect (amount of increase or decrease) of recognition of the bad debt estimate on other expenses, income tax expense, and net income.
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