Question

Accounting Methods & Estimates and Their Effects on Net Income Homework Two different companies were organized to sell gee-gaws to the public. Both companies expect this to be a widely used device with increasing Sales each year. With increased enhancements, each year, they expect the sales price per unit to increase each year. Both companies expect to sell 10,000 units, at a selling price of $2,000 each, during their first year of business. Sales are anticipated to increase by 10% (in units - at a compounded rate) during each of the next two years. At the same time, the selling price per unit will increase by a compounded annual rate of 10%. The same supplier provides the devices to both companies. The cost of the product is 60% of the sales price. Like the sales price, the cost will increase each year. Both companies keep a safety stock equal to 1,000 units at all times. (For example, during the first year each company will purchase 11,000 units - the 10,000 units to be sold plus an additional 1,000 units “just in case." During the second year, 11,000 units will be purchased - 1,000 units will remain from the first year.) Service contracts are available with each hardware device. These contracts cover the device "top to bottom" for a period of four years. The service contract costs $500, for this period, and the price will remain the same for the first three years of business. One- half of all customers purchase the service contract. Selling & Administrative Expenses (Salaries, Advertising, and et. al.) are budgeted to be $1,000,000 during the first year and grow at a compounded rate of 3%. Plant & Equipment costing $600,000 will be purchased at inception and will be depreciated using the Straight-Line method assuming no salvage value. Using an electronic spreadsheet, please complete a three year Budgeted Income Statement for each of the companies using the following assumptions:

Answer 1

Accounting method and estimates A B с D E Ін Year 1 Year 2 K Year 3 11000 12100 2,200 $ 2,420 Accounting method and estimates Plant & Equip $ 600,000 10,000 2,000 $ $ 10% Sales (units) 10% Selling price Company two Year 1 Company one Year 2 Income Statement Year 1 Year 3 Income Statement Year 2 Year 3 Sales $ 20,000,000 $ 24,200,000 $ 29,282,000 Sales $ 20,000,000 $ 24,200,000 $ 29,282,000 8 Service contracts $ 1,000,000 $ 500,000 $ 500,000 Service contracts $ 625,000 $ 625,000 $ 625,000 9 Total revenues $ 21,000,000 $ 24,700,000 $ 29,782,000 Total revenues $ 20,625,000 $ 24,825,000 $ 29,907,000 10 11 FIFO Cost of goods sold $ 12,000,000 $ 13,080,000 $ 14,256,000 LIFO Cost of goods sold $ 12,000,000 $ 13,200,000 $ 14,520,000 12 3% Selling and admin. $ 1,000,000 $ 1,030,000 $ 1,060,900 3% Selling and admin. $ 1,000,000 $ 1,030,000 $ 1,060,900 13 15 Depreciation $ 40,000 $ 40,000 $ 40,000 10 Depreciation $ 60,000 $ 60,000 $ 60,000 14 3% Bad debts $ 630,000 $ 741,000 $ 893,460 4% Bad debts $ 825,000 $ 993,000 $ 1,196,280 15 Total expenses $ 13,670,000 $ 14,891,000 $ 16,250,360 Total expenses $ 13,885,000 $ 15,283,000 $ 16,837,180 16 17 Net Income $ 7,330,000$ 9,809,000 $ 13,531,640 Net Income $ 6,740,000 $ 9,542,000 $ 13,069,820 18 19 Service Contracts Service Contracts 20 Revenue recognised Revenue recognised 21 Year Contracts signed Year 1 Year 2 Year 3 Year Contracts signed Year 1 Year 2 Year 3 22 1 2,500,000 1,000,000 1 2,500,000 625,000 23 2 500,000 2 625,000 24 3 500,000 3 625,000 25 Total $ 1,000,000 $ 500,000 $ 500,000 Total $ 625,000 $ 625,000 $ 625,000 26 271 28 Year 1 Year 2 Year 3 Year 1 Year 2 Year 3 29 Current cost of Difference in net income 30 Product per unit $ 1,200 $ 1,320$ 1,452 in two companies $ 590,000 $ 267,000 $ 461,820

Working notes: A D E Year 2 1 2 Add 3 Less 4 Opening balance Purchase Sales Closing Balance Price Cost of goods sold - FIFO B C Year 1 Year 2 Year 3 0 1000 11000 11000 10000 10000 1000 2000 1,200 1,320 2000 11000 10000 3000 1,452 1 2 Add 3 Less 4 Opening balance Purchase Sales Closing Balance Cost of goods sold - LIFO F G H Year 1 Year 2 Year 3 0 1000 2000 11000 11000 11000 10000 10000 10000 1000 2000 3000 1,200 1,320 1,452 5 Cost of goods sold Cost of goods sold 12,000,000 B3 *B5 13,080,000 14,256,000 1000 *B5+9000*C5 2000*C5+8000*D5 12,000,000 F3*F5 13,200,000 G3*65 14,520,000 H3*H5