Case Study: For this assignment students will analyze two separate companies and their accounting processes. To assist in the Comparative Analysis, there is a Trial Balance, Income Statement and Balance Sheet.
Part of the analysis is to identify the methods of estimation for Allowances (Provisions) and year-end Adjustments used by each company and how each method has an effect, for example on Total Assets and Net income.
Please read the following and then answer the questions at the end on a NEW document. You must have a cover sheet with your student name, student number and tutorial number.
References: HARVARD
Information:
The two companies, Wild River Trading Company and New World Company, have identical transactions throughout the year and differ only in their estimation methods and adjusting year-end entries.
These estimation methods (for example, Bad Debt Expense) are integral to the differences in the companies, but are not implemented until year-end. The two companies' identical transactions during the year are reflected in the following Trial Balance.
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Trading Company
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Trial Balance
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Debits
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Credits
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Cash
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mce_markernbsp; 47,340
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Accounts Receivable
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mce_markernbsp; 99,400
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Inventory
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mce_markernbsp; 239,800
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Land
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mce_markernbsp; 70,000
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Building
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mce_markernbsp; 350,000
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Equipment
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mce_markernbsp; 80,000
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Accounts Payable
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mce_markernbsp; 26,440
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Commercial Bill Payable
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mce_markernbsp; 380,000
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Interest Payable
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mce_markernbsp; 6,650
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Capital
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mce_markernbsp; 160,000
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Sales
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mce_markernbsp; 398,500
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Dividend Expense
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mce_markernbsp; 23,200
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Other Operating Expenses
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mce_markernbsp; 34,200
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Interest Expense
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mce_markernbsp; 27,650
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mce_markernbsp; 971,590
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mce_markernbsp; 971,590
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As seen in this Trial Balance, both Wild River Trading Company and New World Company have the same amounts of Debits and Credits at 30th June.
On this date, however, the two companies begin to differentiate on several items, including their Adjusting Entries and the Allowances (Provisions) used in the entries. The Adjustments are done differently by each company, and therefore affect Net Income for each company differently. These adjustments and their effects are reflected in the Income Statements for the two companies. The Adjustments deal with Bad Debts, Cost of Goods Sold (COGS), Depreciation Expense, a Lease Agreement, and Income Tax Expense.
Other Information
Inventory
Wild River uses a Periodic Inventory with Weighted Average and New World uses Perpetual Inventory with first-in first-out (FIFO).
Depreciation
The two companies both use the straight-line method for depreciation on their building. Wild River also uses the straight-line method for depreciation on their equipment. New World uses the diminishing value depreciation method for their equipment.
Leased Equipment
New World capitalized the Equipment Lease as an Asset.
Assignment Questions:
Question 1: Identify each Adjustment and explain the impact these adjustments have had on the Income Statement and reasons why they are different?
Question 2: Please recommend, which company to invest in and the reasons why?
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