Accounting Alternatives Case At the beginning of the year 20x1, two companies began operations to sell home heating units. Eads Heaters Inc. is located in Eads, Colorado, and Glenwood Heating Inc. is in Glenwood Springs, Colorado. The companies operate under similar economic conditions and have identical operations during the year. However, each manager makes different accounting choices and estimates when applying generally accepted accounting principles (GAAP) in preparing the company’s financial statements.
PART A First-Year Transactions: Both companies have completed identical transactions during the first year of operations, 20x1 but no transactions have been recorded yet. The transactions for each company are listed: 1. January 2, each company issued 3,200 shares of capital stock for $160,000 and commenced operations. 2. On January 2, each company borrowed $400,000 on a twenty-year, seven percent note payable. Interest plus $20,000 principal is due September 30 each year beginning 20x1. 3. On January 3, each company purchased land and a building for $420,000. Both managers assigned $70,000 to the land and $350,000 to the building. Each company paid cash for the land and building. 4. On January 5, each company purchased delivery equipment at a cost of $80,000. Both purchases were made with cash. 5. Each company sells one model of home heating unit and made the following credit purchases during the year. (You may record all the purchases in one transaction.)
Number Date January 10 March 14 June 1 September 15 October 30 of units 40 60 20 62 28
Cost per unit $ 1,000 1,100 1,150 1,200 1,300
6. Each company sold 160 units for $398,500 during the year. All sales were on credit; 90 days, same as cash. Management has not yet determined how inventory and cost of goods sold will be valued. This year management will use the periodic inventory system and record cost of goods sold at the end of the year. Therefore, record the sales piece of this transaction...
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