Question

Accounting Methods & Estimates and Their Effects on Net Income Homework Two different companies were organized to sell gec-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

Company One-

Year 1 Year 2 Year 3

Opening stock - 1000 1000

Purchase 11000 11000 12100

​​​​less Closing stock 1000 1000 1000

Cost of Goods sold 10000 11000 12100

60% of sale 1200 1320 1452

Cost of sale 10000×1200 11000×1320 12100×1452

=12000000 14520000 17569200

Company Two-

Year 1 Year 2 Year 3

Opening stock - 1000 1000

Purchase 11000 11000 12100

​​​​less Closing stock 1000 1000 1000

Cost of Goods sold 10000 11000 12100

60% of sale 1200 1320 1452

Cost of sale 10000×1200 11000×1320 12100×1452

=12000000 14520000 17569200

Company One Income Statement Yearl. Sales 20000000 Year2 Year 3. 24200000 2928 2000 (10000% 2000) (lloux 2200) (12100 x 2420) 3025 000 Service contract 2750 000 2.750 000 32307000 26950000 Total Revenue © 22750000 1 14520000 17569200 I Cost 1060900 60000 of Goods sold 12.000.000 Selling , Adm. Exp 10000 DO 1030000 Depreciation 60000 60000 Bad debts Total Expenses ®) 13060001 E 18690100 1561.0000 13616900 Y 11340000 9690000 Net Income Bad debts - No information otherwise Rate Calculated on sale 2200X10 +2200 price 2000 2000 x10 +-2000 TOD i 2200 2420