Part 1:

Great Textile Bhd is a trading company in Malaysia that sells fabrics. It has been 10 years in the market and the company is very optimistic for its yearly sales growth. The company is now a leading company that received an overwhelming demand from customers. Great Textile has become customers number one choice when it comes to fabrics due to the high quality, good designs, reasonable prices and variety of choices.

Great Textile sells three types of fabrics: cotton, crepe silk and songket. Currently Great Textile uses perpetual inventory recording system. However, in terms of cost flow assumption, the company uses different method based on sales. Due to the characteristics of the fabrics and the pattern of sales made for each fabric, the company uses FIFO (First-In-First-Out) method for cotton, moving average method for crepe silk fabrics, and specific identification method for songket fabric.

Great Textile uses calendar year (accounting year ends 31 December) in recording its accounting records and prepares its financial statements every 12-month. All transactions related to inventory are recorded using gross method. Followings are the details of the fabrics inventories as recorded in the system dated 1 January 2019.

15 January	Received on hand the 500 metres of printed Egyptian Cotton from a supplier in Indonesia. The order was made on 13 December 2018. The cost for each metre is RM40. The import duties and taxes charged to the Great Textile for the purchases made are RM500 and RM250 respectively. The transportation cost to deliver the fabrics to the premise is RM300. The purchase of the fabric was made by cash. Payment to the supplier was made upon the receipt of the fabrics.
1 March	Sold 30 metres of batik crepe silk to Kasuma Holdings by credit at a price of RM135 per metre. The credit terms given was 2/30, n/45.
30 March	Received payment from Kasuma Holdings.
20 April	Purchased 200 metres of Songket from a supplier in Brunei at the total cost of RM60,000. The transportation cost amounted RM270 is signed under FOB shipping point term. Great Textile receives trade discount of RM400 from the supplier. The purchase was made by cash.
5 May	Purchased 50 metres of batik motif Crepe Silk from a supplier in Kelantan. Each metre of the fabric costs RM125. The transportation cost amounted RM150 is signed under FOB destination term. The purchase of the fabric was made by cash.
13 June	Sold 25 metres of Egyptian Cotton at a price of RM55/metre and 130 metres of Songket Terengganu at a price of RM420/metre to Hasnul Bhd by cash.
7 July	5 metres of the batik motif Crepe Silk bought on 5 May were returned to the supplier due to major defect and received full payment.
10 September	4 metres of Egyptian Cotton was returned by Hasnul Bhd due to colour defect. Full payment was paid to the customer.
25 November	Sold 120 metre of Songket Brunei to Landa Gim at a price of RM350/metre by credit with a term of 3/60, n/80.

In the system record, the amount of each type of fabric at 1 January 2019 is as follows:

	Egyptian Cotton	Crepe Silk	Songket
Unit (metres)	240	350	300
Cost per metre	RM38	RM115	RM350
Type			Terengganu

Additional information:

The balance of inventory of songket as at 31 December 2019 is:

1. Songket Terengganu: 170 metres
2. Songket Brunei: 80 metres

In addition to that, information on receivables of Great Textiles are as follows.

Scenario 1

The chief accountant of Great Textiles provides the following list of accounts receivable written off in that particular year.

Date	Customer	Amount (RM)
31 March	Erina Clothing Bhd	7,800
30 June	Sentosa Apparel Bhd	9,700
30 September	Alia Textile Bhd	7,000
31 December	Raisha Collection Bhd	9,830

Great Textiles follows the policy of debiting bad debt expense as accounts are written off. All of Great Textiless sales are on a 30-day credit basis. Sales for the current year total RM2,200,000. The balance in Accounts Receivables at year end is RM77,000 and an analysis of customer risk and charge-off experience indicates that 12% of receivables will be uncollectible (assume a zero balance in the allowance).

Scenario 2

Great Textiles finances some of its current operations by assigning accounts receivables to a finance company. On 1 July 2019, it assigned under guarantee, specific accounts amounting to RM150,000. The finance company advanced to Great Textiles 80% of the accounts assigned (20% of the total to be withheld until the finance company has made its full recovery), less a finance charge of 0.5% of the total accounts assigned.

On 31 July 2019, Great Textiles received a statement that the finance company had collected RM80,000 of these accounts and had made an additional charge of 0.5% of the total accounts outstanding as of 31 July. This charge is to be deducted at the time of the first remittance due Great Textiles from the finance company. On 31 August 2019, Great Textiles received a second statement from the finance company, together with a check for the amount due. The statement indicated that the finance company had collected an additional RM50,000 and had made a further charge of 0.5% of the balance outstanding as of 31 August 2019.

Case instruction:

1. Based on the information given above, compute the cost of the fabrics purchased in January, April and May 2019.
2. Prepare a schedule to compute the cost of sales and value of ending inventory for each type of inventories as at 31 December 2019.
3. Prepare journal entries to record all the transactions.
4. Mr. Alif, the accountant in Great Textile found it tedious to use two different cost flow methods for Crepe Silk and Egyptian Cotton fabrics. Mr. Alif wants to suggest the management to use only one method to record inventory for both fabrics. This is due to the almost similar pattern of sales made by both fabrics. Prepare a schedule to show the cost of sales and ending inventory using FIFO method for crepe silk fabric. Compare the result with your answer in (2) and suggest to Mr. Alif whether he should proceed with his suggestion to the management. Provide justification.
5. Do you agree or disagree with Great Textiless policy concerning recognition of bad debt expense in Scenario 1? Why or why not?
6. By what amount would net income differ if bad debt expense was computed using the percentage-of-receivables approach in Scenario 1?
7. Explain allowance method in estimating bad debts and provide justification for its use.
8. Assume in Scenario 1, Great Textiles uses the allowance method to estimate bad debts instead of direct write-off method. How should Great Textiles account for the collection of the specific accounts previously written off as uncollectible?
9. Prepare all necessary journal entries in Scenario 2 for Great Textiles.