Merchandise company

A merchandise companys sales and purchases during the year are as follows.

Date	Transaction	Quantity	Cost/unit	Price/unit	Collection
Jan 1	Beg. Inv.	100
Jan 12	Purchase	60	16
Jan 29	Purchase	80	17
Feb 26	Sale	70		24	Cash sale
Mar 15	Sale	50		25	Apr 28
Apr 26	Purchase	40	19
May 6	Sale	50		25	Jul 17
May 14	Sale	30		27	Uncollected
Jun 3	Purchase	40	20
Jul 6	Sale	30		26	Jul 8
Aug 20	Purchase	20	20
Sep 5	Purchase	30	21
Oct 19	Sale	60		29	Uncollected
Dec 4	Sale	40		30	Uncollected
Dec 15	Purchase	60	22
Dec 31	End. Inv.	100

Cost per unit of beginning inventory for each method is as follows.

	Perpetual	Periodic
FIFO	15	15
LIFO	13	10
Weighted Average	14	12

The sales price per unit above is the undiscounted price. The company discounts 3% from cash sales and offers 2/30, n/90 as the term of credit sales.

The company had $500 of allowance for doubtful accounts at the end of the previous year. The company wrote off $100 of accounts receivable from the previous year but did not write off any accounts receivable from the current year. All other accounts receivable from the previous year were collected during the current year.

Answer the following questions using the above facts.

(a) What is the companys net sales (do not consider bad debt expense here)?

(b) Suppose the company uses the percentage-of-sales method to determine bad debt expense. If the company uses 3% of undiscounted credit sales as an estimate of bad debt expense, what are bad debt expense and ending balance of allowance for doubtful accounts?

(c) Suppose the company uses the aging-of-accounts method to determine bad debt expense. If the company estimates 1% of accounts receivable aged 0-30 days uncollectible, 5% of accounts receivable aged 31-90 days uncollectible, 25% of accounts receivable aged 91-180 days uncollectible, and 70% of accounts receivable aged more than 181 days uncollectible, what are bad debt expense and ending balance of allowance for doubtful accounts?

(d) Just for this question, suppose the company wrote off accounts receivable from sales on May 14. How would your answers to (b) change? Do you think the company can still use 3% to estimate bad debt expense? Does the company have a similar issue if it used the aging-of-accounts method?

(e) Just for this question, suppose the company had $1,000 of allowance for doubtful accounts at the end of the previous year. Does the manager have any discretion to manipulate net income just by deciding which accounts receivable should be written off (without adjusting the percentages)? Support your answer by showing how your answers to (b) and (c) change when the company writes off accounts receivable from sales on May 14.

(f) Suppose the company uses the periodic method to track inventory. For the three inventory flow assumptions, what are cost of goods sold and ending balance of inventory? How much is the LIFO reserve?

(g) Suppose the company uses the perpetual method to track inventory. For the three inventory flow assumptions, what are cost of goods sold for each sales transaction? What are cost of goods sold for the whole year and ending balance of inventory? How much is the LIFO reserve?

(h) Using your answers in (f) and (g), show that LIFO cost of goods sold is larger than FIFO cost of goods sold by the amount of LIFO reserve increase during the year.

(i) Suppose the company has an option to return the purchase on December 15 before year end. Which combinations of inventory tracking method and inventory flow assumption allows the manager to manipulate net income using this option? What are the new cost of goods sold for such combinations assuming that the option is exercised? If the manager wants to increase net income, would he/she exercise the option?

(j) Just for this question, suppose the net realizable value of the inventory dropped to $20 per unit due to a demand shock around Christmas. How much loss should the company recognize for each combination of inventory tracking method and inventory flow assumption?