¶ … 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,...
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