Sing Songs Ltd Using the Following Information About Activities for 2019-2021, Derive the Its

question 76

Essay

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

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Definitions:

Sutures

Threads or staples used by surgeons to close wounds or surgical incisions.

Wound Healing

The process of the body repairing tissue damage through stages that include clotting, inflammation, growth, and remodeling.

Staples

Metal wires bent to form a U shape, used to bind sheets of paper together or to attach materials to surfaces.

Sebaceous Cyst Removal

The surgical procedure to remove a sebaceous cyst, which is a closed sac under the skin filled with a cheese-like or oily material.