Finance and Accounts Case Study

¶ … 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.