Reference no: EM1314126

The question is about preparation of income statement schedule.

You have been asked by a client to review the records of Layman Lumber Company, a small manufacturer of precision tools and machines. Your client is interested in buying the business, and arrangements have been made for you to review the accounting records.

Your examination reveals the following:

1. Layman Lumber Company commenced business on April 1, 2005, and has been reporting on a fiscal year ending March 31. The company has never been audited, but the annual statements prepared by the bookkeeper reflect the following income before closing and before deducting income taxes.

2. A relatively small number of machines have been shipped on consignment. These transactions have been recorded as ordinary sales and billed as such. On March 31 of each years, machines billed and in the hands of consignees amounted to:

Sales price was determined by adding 30% to cost. Assume that the consigned machines are sole the following year.

3. On March 30, 2007, two machines were shipped to a customer on a C.O.D. basis. The sale was not entered until April 5, 2007, when cash was received for $6,100. The machines were not included in the inventory at March 31, 2007. (Title passed on March 30, 2007).

4. All machines are sold subject to a 5-year warranty will amount to ½ to 1% of sales. The company has charged an expense account for warranty costs incurred.

Sales per book and warranty costs were as follows:

5. A review of the corporate minutes reveals the manager is entitled to a bonus of ½ of 1% of the income before deducting income taxes and the bonus. The bonuses have never been recorded or paid.

6. Bad debts have been recorded on a direct writeoff basis. Experience of similar enterprises indicates that losses will approximate ¼ of 1% of sales. Bad debts written off were:

7. The bank deducts 6% on all contracts financed. Of this amount, ½% is placed in a reserve to the credit of Layman Lumber Company that is refunded to Layman as finance contacts are paid in full. The reserve established by the bank has not been reflected in the books of Layman Lumber Company. The excess of credits over debits (net increase) to the reserve account with Layman Lumber Company on the books of the bank for each fiscal year were as follows.

8. Commissions on sales have been entered when paid. Commissions payable on March 31 of each year were as follows.

Instructions:
(a) Present a schedule showing the revised income before income taxes for each of the years ended March 31, 2006, 2007, and 2008. (Make computations to the nearest whole dollar.)

(b) Show all of the computations to support your revisions for (a) above.