Problem: Preparing an income statement and balance sheet for two companies. Information for these companies is given below. This group collaboration project will be worked on in pairs assigned by your instructor. Here is the information:
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:
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Cash
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$80,000
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Merchandise Inventory (3,000 units at $3 each)
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9,000
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Delivery trucks
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75,000
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Note payable (10%)
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70,000
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Common stock
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94,000
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During 2011, the two companies had identical transactions. All five transactions described below were cash transactions.
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Purchase: 3/1/11 (3,400 units at $6 each)
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$20,400
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Purchase: 5/1/11 (7,000 units at $8 each)
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56,000
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Sales: 8/1/11 (10,000 units at $15 each)
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150,000
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Selling expenses paid at various dates
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21,000
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Administrative expenses paid at various dates
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17,000
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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.
Step 1: Aardvark Company wishes to report as high a net income as possible. Prepare a 2011 income statement for Aardvark. Choose the depreciation method and inventory cost flow assumption that will result in the highest net income.
Step 2: Based on the information given and the 2011 income statement prepared in Step 1, prepare a 12/31/11 balance sheet for Aardvark. Use the same depreciation method and inventory cost flow assumption as in Step 1.
Step 3: Bear Company wishes to report as low a net income as possible. Prepare a 2011 income statement for Bear. Choose the depreciation method and inventory cost flow assumption that will result in the lowest net income.
Step 4: Based on the information given and the 2009 income statement prepared in Step 3, prepare a 12/31/11 balance sheet for Bear. Use the same depreciation method and inventory cost flow assumption as in Step 3.