Sing Songs Ltd. started operations on January 1, 2019. During its first year of operations, the company had a choice of accounting policies:

\begin{array} { | l | l | l | } \hline & \text { Accounting Option 1 } & \text { Accounting Option } 2 \\\hline \text { Inventory valuation } & \text { FIFO } & \text { Average cost } \\\hline \text { Bad debt expense } & 7 \% \text { of sales } & \begin{array} { l } \text { Allowance: } 20 \% \text { of } \\\text { losing (gross) accounts } \\\text { receivable }\end{array} \\\hline \text { Warranty expense } & 5 \% \text { of sales } & \begin{array} { l } \text { Allowance: an analysis } \\\text { of sales and repairs }\end{array} \\\hline\end{array}

Using the following information about activities for 2019-2021, derive the 2019 net income (only)under both accounting options and explain why the net income under the two methods is not the same.

\begin{array} { | l | r | r | r | } \hline & 2019 & 2020 & 2021 \\\hline \text { Sales (all on account) } & 10,500,000 & 13,500,000 & 14,100,000 \\\hline \text { Inventory purchases (paid immediately) } & 4,500,000 & 3,000,000 & 2,900,000 \\\hline \text { Ending inventory value: FIFO } & 1,800,000 & 2,000,000 & 2,150,000 \\\hline \text { Ending inventory value: Average cost } & 1,710,000 & 1,750,000 & 2,150,000 \\\hline \text { Collections } & 9,500,000 & 12,500,000 & 7,165,000 \\\hline \text { Amounts actually written off } & 100,000 & 250,000 & 750,000 \\\hline \text { Warranties actually paid } & 180,000 & 500,000 & 525,000 \\\hline \begin{array} { l } \text { Estimated warranty payable ending } \\\text { balance based on ageing analysis of } \\\text { sales }\end{array} & 385,000 & 525,000 & 700,000 \\\hline \text { Depreciation expense } & & & \\\hline \text { All other operating expenses (paid } & 2,500,000 & 2,800,000 & 3,000,000 \\\hline \text { mmediately) } & & & \\\hline\end{array}

Which Statement Is Not Correct About Expenses in the Income

Multiple Choice

Correct Answer:VerifiedUnlock this answer nowGet Access to more Verified Answers free of chargeAccess For Free

Correct Answer:
Verified
Unlock this answer now
Get Access to more Verified Answers free of charge