You have been assigned to the audit team for B.B. JAMS Ltd., one of your significant clients. Below is the income statement prepared by the company's accountant for the December 31, 2012 year end.
B.B. JAMS LIMITED
INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2012
Sales………………………………………………………… $147,840,000
Cost of sales (Note (1)) …….……………………………… (119,859,000)
Gross profit…………………………………………………… $ 27,981,000
General and administrative expenses (notes (2)-(7)) ………… (12,374,000)
Selling expenses (Note (8)) …………………………………… (9,311,000)
Income from operations…………………………………..…… $ 6,296,000
Other income (Notes (9)-(10)) ………………………………………16,000
Net income before income taxes………………………………… $ 6,312,000
Provision for income taxes……………………………………… (2,528,000)
Net income……………………………………………………… $ 3,784,000
Notes:
Through various discussions with the accountant, you have been able to determine that the following information has been recorded in the financial statements:
(1) JAMS had a number of items of inventory that did not sell well in the current year. For accounting purposes, the accountant has recorded a reserve for inventory obsolescence. The reserve was calculated based on the carrying value of any inventory item that had not had a sale in the last 180 days. The reserve at year-end was $1,285,000.
(2) JAMS provides insurance for employees and paid the following amounts to Nat Insurance Company during the year:
$2,000,000 insurance policy on the life of the president included in insurance
expense ($300 per month)…………………………………………….$ 3,600
$1,000,000 insurance policy on the life of the vice-president — marketing
included in insurance expense…………………………………………..2,000