Question

Integrated Physicians & Associates, an investor-owned company, had the following general ledger account balances at the end of 2015:
Gross patient service revenue (total charges)	$975,000
Contractual discounts and allowances to third-party payers	$250,000
Charges for charity (indigent) care	$100,000
Estimated provision for bad debts	$50,000

b) Suppose the 2015 contractual discounts and allowances balance reported above is understated by $50,000. In other words, the correct balance should be $300,000. Assuming a 40% income tax rate, what would be the effect of the misstatement on Integrated Physicians & Associates' 2015 reported:

1. Net patient service revenue?

2. Total expenses, including income tax expense?
3. Net income?

(For each item, indicate whether the balance is overstated (reported amount is more than true amount), understated (reported amount is less than true amount), or not affected by the misstatement. If overstated or understated, indicate by how much.-

Answer 1

The answer is provided as below

Net patient service revenue? - Overstated by $50,000 [because the reported amount of net patient service revenue of $725,000 (975,000 - 250,000) is more than the true amount of $675,000 (975,000 - 250,000 - 50,000)]

____

Total expenses, including income tax expense? Overstated by $20,000 [because the reported amount of income before taxes of $575,000 (725,000 - 100,000 - 50,000) is more than the true amount of $525,000 (675,000 - 100,000 - 50,000) by a value of $50,000 resulting in extra tax to the extent of $20,000 (50,000*40%). However, other expenses would remain unaffected]

____

Net income? Overstated by $30,000 [because the reported amount of net income $345,000 (575,000 - 575,000*40%) is more than the true amount of $315,000 (525,000 - 525,000*40%)]