¶ … Aging Method:
Determine Rogal's bad debt expense for 2004.
Age (Days)
Amount
% Estimated Uncollectible
Bad Debt
Total
Assume that on January 1, 2005, $10,000 of specific receivables are identified as uncollectible and are written off. Does this write-off affect 2005's income before taxes?
The write-off does not affect the income before taxes of the year 2005. This is because the uncollectible amount is removed from the accounts receivable account of Rogal. This write-off to bad account has an impact on the accounts only on the statement of financial position by debiting the doubtful accounts and crediting the accounts receivable. The loss or the expense is not reported or relayed on the income statement since the bad debt write-off takes into account under the changing entries for calculated bad debts expense (Tracy, 2006).
Assume that on January 1, 2005, $10,000 of specific receivables are identified as uncollectible and are written off, and that no collections on accounts or sales on account were made on that day. Compute the balance of net accounts receivable on January 1, 2005 (after the write-off) and compare it to the balance of net accounts receivable as of December 31, 2004 (immediately before the write-off)
The balance of net accounts receivable as of 31 December 2004
384, 000 -- 13,760 = 370,240
The balance of net accounts receivable on 1 January 2005
370, 240 -- 10,000 = 360,240
b. Suppose that instead of aging, Rogal uses the percent-of-sales method to estimate bad debt expense. Suppose Rogal estimates that one-half of one percent of credit sales are uncollectible. Determine the December 31, 2004 balance in the allowance for doubtful accounts account
0.01 / 2 x 384,000 = 1,920
c. Briefly explain why accountant don't just wait until specific accounts become uncollectible before recognizing any bad debt expense
The accountants don't just wait until specific accounts become uncollectible before recognizing any bad debt expense because when sales are made, the revenue is recognized immediately. This aspect is considered for the accounting books to reflect a true view for the decision makers to undertake a rational assessment of the financial health and future opportunities (Tracy, 2006).
Problem 9-4 (p 192)
a. Compute the value of the ending inventory at December 31, 2003, under FIFO, LIFO, and average cost flow assumptions. LTM uses the periodic method of inventory valuation.
Units Available for Sale = 44,000
Units Sold = 41,000
Units in Ending Inventory = 3,000
Cost of Goods Sold
Units
Unit Cost
Total
Sales from 1 Jan Inventory
5,000
30
150,000
Sales from 6 Feb Purchases
20,000
34
680,000
Sales from 18 Jul Purchases
17,000
36
612,000
Sales from 20 Oct Purchases
2,000
38
76,000
44,000
1,518,000
FIFO
Ending Inventory
Units
Unit Cost
Total
Inventory from 20 Oct Purchases
3,000
38
114,000
LIFO
Ending Inventory
Units
Unit Cost
Total
Inventory from 20 Oct Purchases
3,000
30
9,000
Average Cost
Ending Inventory
Units
Unit Cost
Total
Inventory from 20 Oct Purchases
3,000
60
180,000
b. Compute the gross profit generated during 2003 using FIFO and LIFO
i. FIFO
Sales Revenue
Units
Unit Cost
Total
Sales from 1 Jan Inventory
5,000
30
150,000
Sales from 6 Feb Purchases
20,000
34
680,000
Sales from 18 Jul Purchases
16,000
36
576,000
1,406,000
Cost of Goods Sold
Units
Unit Cost
Total
Sales from 1 Jan Inventory
5,000
30
150,000
Sales from 6 Feb Purchases
20,000
34
680,000
Sales from 18 Jul Purchases
17,000
36
612,000
Sales from 20 Oct Purchases
2,000
38
76,000
1,518,000
Ending Inventory
3,000
38
114,000
1,404,000
Gross Profit
2,000
ii. LIFO
Sales Revenue
Units
Unit Cost
Total
Sales from 1 Jan Inventory
5,000
30
150,000
Sales from 6 Feb Purchases
20,000
34
680,000
Sales from 18 Jul Purchases
16,000
36
576,000
1,406,000
Cost of Goods Sold
Units
Unit Cost
Total
Sales from 1 Jan Inventory
5,000
30
150,000
Sales from 6 Feb Purchases
20,000
34
680,000
Sales from 18 Jul Purchases
17,000
36
612,000
Sales from 20 Oct Purchases
2,000
38
76,000
1,518,000
Ending Inventory
3,000
30
90,000
1,428,000
Gross Profit
-22,000
c. Compute the gross profit percentage generated during 2003 using FIFO and LIFO
i. FIFO
2,000 / 1,406,000 x 100 = 0.14%
ii. LIFO
-22,000 / 1,406,000 x 100 = -1.56%
d. Name a practical reason for LTM to use FIFO
The main reason why LTM should employ FIFO is because the company will not have to deal with inventory that is deemed outdated that cannot be sold anymore. This is because the method ensures that the oldest inventory items are used or retailed before they become obsolete.
e. Name a practical reason for LTM to use LIFO
The reason why LTM should use LIFO is that it brings about less taxable income and therefore less income tax payments for the company. This implies that in the long run or when the costs increase significantly, the lower income tax payments will be substantial
f. If LTM were considering a switch from FIFO to LIFO, it would have to be concerned with the LIFO conformity rule. Explain.
Switching from FIFO to LIFO would have to be concerned with the LIFO conformity rule. That is so, because once the method is employed in calculating the tax return of the company, then no other method can be used to value the inventory in order to calculate income, profit or loss of the company in the same year which is given to the shareholders or owners and creditors of the company.
g. Assume LTM uses LIFO and the same number of units were sold. Would the company benefit from purchasing 1,000 units at a cost of $40 each on December 31, 2003? Explain
Sales Revenue
Units
Unit Cost
Total
Sales from 1 Jan Inventory
5,000
30
150,000
Sales from 6 Feb Purchases
20,000
34
680,000
Sales from 18 Jul Purchases
16,000
36
576,000
1,406,000
Cost of Goods Sold
Units
Unit Cost
Total
Sales from 1 Jan Inventory
5,000
30
150,000
Sales from 6 Feb Purchases
20,000
34
680,000
Sales from 18 Jul Purchases
17,000
36
612,000
Sales from 20 Oct Purchases
2,000
38
76,000
1,518,000
Ending Inventory
3,000
40
120,000
Purchases
1,000
40
40,000
1,388,000
Gross Profit
-32,000
The company would definitely benefit because the ending inventory would be valued at a higher price of $40 and not $38 as before
h. Would your answer to part (g) be the same if LTM used FIFO? Explain
Sales Revenue
Units
Unit Cost
Total
Sales from 1 Jan Inventory
5,000
30
150,000
Sales from 6 Feb Purchases
20,000
34
680,000
Sales from 18 Jul Purchases
16,000
36
576,000
1,406,000
Cost of Goods Sold
Units
Unit Cost
Total
Sales from 1 Jan Inventory
5,000
30
150,000
Sales from 6 Feb Purchases
20,000
34
680,000
Sales from 18 Jul Purchases
17,000
36
612,000
Sales from 31 Dec Purchase
1,000
40
40,000
Sales from 20 Oct Purchases
2,000
38
76,000
1,558,000
Ending Inventory
3,000
38
114,000
1,404,000
Gross Profit
-38,000
The company would not really benefit as the ending inventory would still be valued at $38
i. If LTM decides to switch from average cost to FIFO, assuming the cost behavior patterns in evidence during the year, would its income be higher or lower than if it had stayed with average cost? Explain
The company's income would be much higher if it had stayed with the average cost. This is because the average cost is $60, which is a much higher amount when compared to the other prices used in FIFO
j. Assume LTM was required to make a lower of cost or market adjustment of $4,000 to its year-end inventory. Prepare journal entries showing two alternative approaches for this write-down
i. FIFO
Dr: Uncollectible Account 4,000 x 38 =152,000
Cr: Inventory 152,000
ii. LIFO
Dr: Uncollectible Account 2,000 x 30 = 60,000
2,000 x 34 = 68,000
Cr: Inventory 128,000
k. Would the entries made in part (j) result in any differences in LTM's income statement for 2003? Explain
The write-off does not affect the income before taxes of the year 2003. This is because the uncollectible amount is removed from the accounts receivable account of the company. This write-off to bad account has an impact only on the accounts of the statement of financial position by debiting the doubtful accounts and crediting the accounts receivable.
l. If the inventory written down in part (j) increased in value $6,000 in 2004, what should LTM do under generally accepted accounting principles? Explain
The company in accordance with the generally accepted accounting principles should report such information as it has an impact on the accounts receivable account. These aspects are taken into consideration for the accounting books to reflect a true view for the decision makers to undertake a rational assessment of the financial health and future opportunities (Tracy, 2006).
Problem 10-2 (p 227)
a. Determine the amount that Norris would have been willing to pay for the security on January 1, 2003.
500,000 = 104%
100/104 x 500,000 = $480,769
b. Assume that interest rates remain at 4%. What will be the value of the security on December 31, 2003, and December 31, 2004?
i. Value of security on December 31, 2003
$500,000 x (1 + 0.04)
$500,000 x (1.04)
= $520,000
ii. Value of security on December 31, 2004
$500,000 x (1 + 0.04)2
$500,000 x (1.04)2
= $540,800
c. Prepare the entries necessary on the following dates:
i. January 1, 2003, for the purchase of the security
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