A Company and B Company are competing businesses. Both began operations six years ago and they are quite similar in most respects. The current balance sheet data for the two companies are as follows: Cash Accounts Receivable Allowance for Doubtful Accounts Inventory Capital Assets Accumulated Amortization, Cap Assets Total Assets A Company $ 50,300 309,700 (13,600) 463,900 245,300 (107,650) $947,950 B Company $ 48,400 312,500 0 520,200 257,300 (189,850) $948,550 Current Liabilities Long Term Debt Total Liabilities Owner's Equity Total Liabilities & Owner's Equity $440,200 78,000 518,200 429,750 $947,950 $436,500 80,000 516,500 432,050 $948,550 You have been hired as a consultant to conduct a review of the two companies. Your goal is to determine which of them is in a 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. A Company has used the allowance method of accounting for bad debts. A review shows that the amount of its write-offs each year have been quite close to the allowances that have been provided. It seems reasonable to have confidence in its current estimate of bad debts. B Company has used the direct write off method for bad debts. It has been somewhat slow to write off uncollectable accounts. Based on an ageing schedule analysis and review of its accounts receivable, it is estimated that $14,000 of its existing accounts will become uncollectible. 2. 3. A Company 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 the current replacement cost. Based on a detailed physical examination of its merchandise on hand, the current replacement cost of its inventory is estimated at $500,000. B Company used the FIFO method of valuing inventory. The result is that its ending inventory appears on the balance sheet at an amount that quite closely approximates its replacement cost. A Company estimated a useful life of 12 years and a residual value of $30,000 for its capital assets and has been amortizing them on a straight-line basis. B Company has the same type of capital assets. However, it estimated a useful life of 10 years and a residual value of $10,000. It has been amortizing its capital assets using the double declining balance method. Based on engineering studies of these types of capital assets, you conclude that B's estimates and method for calculating amortization are the more appropriate. Among its current liabilities, A Company has included the portions of long-term debt that become due within the next year. B Company has not done so. You find that $30,000 of B Company's $80,000 of Long-Term Debt are due to be repaid in the current year. 4. a. Required: Using similar accounting principles, revise the balance sheets presented above so that the data are comparable and reflect the current financial position of each of the companies. b. State your conclusions as to which company is a better investment