Hometown Cleaners Inc. operates a small dry-cleaning business. The company has always maintained a complete and accurate set of records. Unfortunately, the company’s accountant left in a dispute with the president and took the 2014 financial statements with him. The following income statement and balance sheet were prepared by the company’s president:
The president is very disappointed with the net income for the year because it has averaged $25,000 over the last ten years. She has asked for your help in determining whether the reported net income accurately reflects the profitability of the company and whether the balance sheet is prepared correctly.
Required
1. Prepare a corrected income statement for the year ended December 31, 2014.
2. Prepare a statement of retained earnings for the year ended December 31, 2014. (The actual balance of Retained Earnings on January 1, 2014, was $42,700. Note that the December 31, 2014, Retained Earnings balance shown is incorrect. The president simply ‘‘plugged in’’ this amount to make the balance sheet balance.)
3. Prepare a corrected balance sheet at December 31, 2014. 4. Draft a memo to the president explaining the major differences between the income statement she prepared and the one you prepared.