Question

Larkspur, Inc. and Sunland Company are competing businesses. Both began operations 6 years ago and are quite similar in most respects. The current balance sheet data for the two companies are shown below.

		Larkspur, Inc.				Sunland Company
Cash			$59,537				$53,147
Accounts receivable			276,823				304,870
Allowance for doubtful accounts			(13,663	)			0
Inventory			493,188				528,300
Plant and equipment			264,000				278,000
Accumulated depreciation—plant and equipment			(117,500	)			(205,124	)
Total assets			$962,385				$959,193
Current liabilities			$397,818				$431,190
Long-term liabilities			71,190				86,190
Total liabilities			469,008				517,380
Stockholders’ equity			493,377				441,813
Total liabilities and stockholders’ equity			$962,385				$959,193

You have been engaged as a consultant to conduct a review of the two companies. Your goal is to determine which of them is in the stronger financial position.

Your review of their financial statements quickly reveals that the two companies have not followed the same accounting practices. The differences and your conclusions regarding them are summarized below.

1.	Larkspur, Inc. has used the allowance method of accounting for bad debts. A review shows that the amount of its write-offs each year has been quite close to the allowances that have been provided. It therefore seems reasonable to have confidence in its current estimate of bad debts.
	Sunland Company has used the direct write-off method for bad debts, and it has been somewhat slow to write off its uncollectible accounts. Based upon an aging analysis and review of its accounts receivable, it is estimated that $18,030 of its existing accounts will probably prove to be uncollectible.
2.	Larkspur, Inc. has determined the cost of its merchandise inventory on a LIFO basis. The result is that its inventory appears on the balance sheet at an amount that is below its current replacement cost. Based upon a detailed physical examination of its merchandise on hand, the current replacement cost of its inventory is estimated at $487,000.
	Sunland Company has used the FIFO method of valuing its merchandise inventory. Its ending inventory appears on the balance sheet at an amount that quite closely approximates its current replacement cost.
3.	Larkspur, Inc. estimated a useful life of 12 years and a salvage value of $29,000 for its plant and equipment. It has been depreciating them on a straight-line basis.
	Sunland Company has the same type of plant and equipment. However, it estimated a useful life of 10 years and a salvage value of $9,000. It has been depreciating its plant and equipment using the double-declining-balance method.
	Based upon engineering studies of these types of plant and equipment, you conclude that Sunland’s estimates and method for calculating depreciation are the more appropriate.
4.	Among its current liabilities, Larkspur has included the portions of long-term liabilities that become due within the next year. Sunland has not done so.
	You find that $15,360 of Sunland’s $86,190 of long-term liabilities are due to be repaid in the current year.

Revise the balance sheets presented above so that the data are comparable and reflect the current financial position for each of the two companies.

		Larkspur, Inc.		Sunland Company
Cash		$		$
Accounts Receivable
Allowance for Doubtful Accounts
Inventory
Plant and Equipment
Accumulated Depreciation
Total Assets		$		$
Current Liabilities		$		$
Long-term Liabilities
Total Liabilities
Stockholders’ Equity
Total Liabilities and Stockholders’ Equity		$		$

Answer 1

Answes : Revised Balance Sheet Larkspus, Inc Sunland Company 59,537 33,147 Cash Accounts Receivable Allowance for Soulffult 2,76823 (13,663) 3,22,900 (18,830) grabt 4,87,000 5,28,300 Tawentary 2,64, ooo 2,78,000 (2500) (2,05,124) Mort & Efeipomene A ceremulated Pepareciation plant & Equiment Total Assets 9,56,197 9.59,193 4,46550 3,9»,818 70,830 71190 Cussent liabilities Long Team Liabilities Total liabilities Stock folders' Equity Total Liabilitiese stick Holders' {anity 4,69008 4,87,189 $1,380 4,4),813 9.59,193 9.56,197