Computer Consulting Limited Was Started in Early 2019 and Continued

question 130

Essay

Computer Consulting Limited was started in early 2019 and continued to operate until early 2022, when it was wound up due to disputes between the two principal shareholders. When it started, the company used these accounting policies:
1. Use straight-line depreciation for the firm's only asset, a computer which cost $1,100,000 and has an estimated useful life of four years.
2. Estimate warranty expense as 9% of sales.
3. Estimate bad debts expense as 5% of sales.
Derive the annual net cash flows for 2019 to 2021. For the year-end balance for 2022, assume accounts receivable, allowance for doubtful accounts, and the warranty accrual are $0, as the firm wound itself up during the year and all timing differences have been resolved.
$$\begin{array} { | l | r | r | r | r | } \hline & 2019 & 2020 & 2021 & 2022 \\\hline \text { Sales (all on account } & 3,400,000 & 3,600,000 & 4,100,000 & 410,000 \\\hline \begin{array} { l } \text { Warranties paid } \\\text { Proceeds on disposal of } \\\text { computer }\end{array} & 272,000 & 288,000 & 420,250 & 147,600 \\\hline \begin{array} { l } \text { Accounts receivable collected in } \\\text { the year }\end{array} & 2,958,000 & 2,880,000 & 3,895,000 & 1,126,000 \\\hline \begin{array} { l } \text { Accounts receivable written off } \\\text { in the year }\end{array} & 102,000 & 108,000 & 205,000 & 236,000 \\\hline \begin{array} { l } \text { All other expenses (paid in cash } \\\text { in the year incurred) }\end{array} & 2,380,000 & 2,520,000 & 2,767,500 & 287,000 \\\hline\end{array}$$

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Definitions:

Fiscal Policy

Governmental adjustment of its spending levels and tax rates to monitor and influence a nation's economy.

Monetary Policy

Monetary policy involves the management of a nation's money supply and interest rates by its central bank to influence economic activity, inflation, and unemployment.

Effectiveness Lag

The delay between the time a policy or action is implemented and when its effects are observed and felt in the economy or targeted area.

Recognition Lag

The delay between the time when an economic problem or trend is identified and the time when it is officially recognized.