Accounting methods and estimates and their effects on net income. Help! I have included an in-class example.

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 25,000 units, at a selling price of $1,000 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 70% of the sales price. Like the sales price, the cost will increase each year. Both companies keep a safety stock equal to 2,000 units at all times. (For example, during the first year each company will purchase 27,000 units - the 25,000 units to be sold plus an additional 2,000 units "just in case. During the second year, 27,500 units will be purchased -2,000 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 $300, 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 $2,000,000 during the first year and grow at a compounded rate of 4%. Plant & Equipment costing $900,000 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: Accounting Methods & Estimates Homework Spreadsheet Template [Suggested Column widths OR "Print to Fit ONE Page Wide by ONE Page Tail [17] [12] [12] [12] [2] [4] [17] 17 [12] F G 1 Your Name Accounting Methods & Estimates Plant & Equip $ 900,000 10% Sales (units) 25,000 3 Date 10% Selling Price $ 1.000 (12) 123 - 12"(1+5G2) $ - $ Company One Year 1 Year 2 = 1213 . 025 Company Two Year 1 Year? Year Income Statement Sales Service Contracts Total Revenues $ Income Statement Sales Service Contracts Total Revenues - 125 $ $ - 2,000,000 11 LIFO Cost of Goods Sold 12 4% Selling & Admin 13 10 Depreciation 14 5% Bad Debts Total Expenses $ 2.000.000 - SE2/SA13 C9 SA14 $ FIFO Cost of Goods Sold 4% Selling & Admin 15 Depreciation 4% Bad Debts Total Expenses Net Income Net Income 5 S Service Contracts Service Contracts Yr 1 Revenue Recognized Year 1 Year 2 - 322 0.25 $ $ Contracts Signed - $120. 5300 Year 3 Year3 Yr 1 Revenue Recognized Year 1 Year? H22*0.4 . Contracts Signed - $120.5" 300 Total 5 . S Total 5 . S Year? Year 3 Year 3 Current Cost of Product (Per Unit Year 1 130 . 7 3 Year 1 117-C17 Difference in Net Income Between Two Companies Year 2 - 5 S $ Formula Hints Suggestion: Use "Font Size" of 10 Accounting Methods & Estimates and Their Effects on Net Income In-Class Example Two different companies were organized to sell gee-gaws to the public. Both companies expect to sell 1.000 units, at a selling price of $1,000 each, during their first year of business 1,000 Service contracts are available with each hardware device. These contracts cover the device top to bottom" for a period of two years. The service contract costs $200 and one-half of all customers purchase the service contract. The same supplier provides the devices to both companies. At the beginning of the year, when 800 units are purchased, each gee-gaw costs $500. Later in the year, when 400 additional units are purchased, each gee-gaw costs $600. Selling & Administrative Expenses (Salaries, Advertising, and et. al.) are budgeted to be $200,000 during the first year of business. Plant & Equipment costing $750,000 will be purchased at inception and will be depreciated using the Straight-Line method assuming no salvage value. Please prepare an Income Statement for each of the companies using the following assumptions: Company One Service Contracts - Management believes that this revenue will be earned evenly over the life of the contract. Cost of Goods Sold - This Company has adopted the Last-In First-Out (LIFO) method of inventory valuation Depreciation - This Company depreciates its assets over a ten year service life. Bad Debts - This Company estimates that 5% of Total Revenues will prove uncollectible. Company Two Service Contracts - Management argues that due to making the sale, initializing the customer's account and set-up problems that 75% of the revenue is earned in Year One. Cost of Goods Sold - This Company has adopted the First-In First-Out (FIFO) method of inventory valuation. Depreciation - This Company depreciates its assets over a fifteen year service life. Bad Debts - This Company estimates that 4% of Total Revenues will prove uncollectible. Accounting Methods & Estimates (and their effects on Net Income) In-Class Example 1.000 x Ipoo Sales Service Contracts Total Revenues Company One one to Two $ 1,000,000 $ 1,000,000 kil pare SDLOOD (75,000 $ 1,0 S ODD $ 1,075,00 Cost of Goods Sold Selling & Admin Depreciation Bad Debts Total Expenses $ 340,000 $ 200,000 75,000 52500 $ 867 SOD $ 520,000 200,000 50,000 43,000 813,000 Net Income $ 192,500 $ 262.000 Calculations: Company One Service Contracts - Management believes that this revenue will be earned evenly over the life of the contract. Cost of Goods Sold - This Company has adopted the Last-In First-Out (LIFO) method of inventory valuation 20/000 10 Depreciation - This Company depreciates its assets over a ten year service life. Bad Debts - This Company estimates that 5% of Total Revenues will prove uncollectible. Company Two Service Contracts - Management argues that due to making the sale, initializing the customer's account and set-up problems that 40% of the revenue is earned during the year of signing. The remaining amount is eamed evenly over the life of the contract. Cost of Goods Sold - This Company has adopted the First-In First-Out (FIFO) method of inventory valuation Slob Depreciation - This Company depreciates its assets over a fifteen year service life. Bad Debts - This Company estimates that 4% of Total Revenues will prove uncollectible