Aardvark Company and Bear Company both began operations on 1/1/11. The companies

Question

Aardvark Company and Bear Company both began operations on 1/1/11. The companies had identical balance sheets at 1/1/11, consisting of the following items:

During 2011, the two companies had identical transactions. All five transactions described below were cash transactions.

The note is due with interest on 1/1/12. The delivery trucks have a useful life of five years with a total expected salvage value of $15,000. Both companies have a 30% income tax rate, and all income taxes for 2011 will be paid in 2012.

Aardvark Company wishes to report as high a net income as possible.

Bear Company wishes to report as low a net income as possible.

Pick one company(Bear Company) and do the income statement and balance sheet, and tell me what they would have gotten for CGS/End Inv and depreciation had they been the other company.

Cash $80,000 Merchandise Inventory (3,000 units at $3 each) 9,000 Delivery trucks 75,000 Note payable (10%) 70,000 Common stock 94,000

Explanation / Answer

Cost of good sold = Beginning Inventory + Inventory Purchases – End Inventory
COGS = $9,000 + ($20,400+$56,000) - ((3000+3400+7000 units)-10,000 units)x$8
COGS = $9,000 + $76,400 - $11,400 = 74,000
Ending Inventory determine by using LIFO because LIFO results in lower net income because cost of goods sold is higher.
Ending Inventory = ((3000+3400+7000 units)-10,000 units)=3400 units ; (3000 units x $3) + (400 units x $6 ) = $11,400
Depreciation = ($75,000 - $15,000)/5 = $12,000
Bear company's Income Statement

Net Income $13,300

Sales $150,000 Less: COGS -$74,000 Gross Profit $76,000 Less: Depreciation -$12,000 Less: Administrative Expense -$17,000 Less: Selling Expenses -$21,000 Earning Before Interest and Tax $26,000 Less: Interest on Notes payable($70,000 x 10%) -$7,000 Earning before Tax $19,000 Tax @ 30% -$5,700

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