Introduction

IFP is a company set up made by Emily and Nathan. This report has focused on giving solutions to the problems that were arising in the company because of the alternative methods that were available. This report has focused on eliminating the alternative issues and gives the individual method that is most beneficial to the company and gains the best results from the solutions.

The report has individually examined four sections that are related to distinct queries that have arisen. All the solutions are individually provided in the report, and the best amongst all the alternatives are also mentioned in the report.

PART A: RECEIVABLES

This section has majorly focused on the treatment of receivables that the company has. As the company is operating on a credit basis too, thus this is the reason why alternative treatments for the receivables are shown. The best alternative that provides the maximum benefits to the company is also regarded in the end.

1. The closing balance of the allowances for doubtful accounts for the year 2019:

The amount of the allowance that can be availed is-

Allowance for Double account = $62600 – $36000

26600

The closing balance of Allowance for doubtful account 2019 is calculated as-

So,

Uncollectible sales for 2019 would be 4% of $1,500,000 =$60000

Allowance for a doubtful account for the year 2019 will be as follows-

Journal of M/s IFP for the year 2019

Particulars	Dr. Amount	Cr. Amount
Allowance for a doubtful account ( beginning balance )		$62,600
To Uncollectible sales	$60,000
To Allowance for a doubtful account ( closing balance )(balancing figure)	$2600
(Being the amount of doubtful debts marked with the balance of uncollected sales, the balancing figure transferred to the closing amount of doubtful account)

 (b) Bad debt account to ascertain the amount of bad debts that will be recorded for the year 2019 is shown in the following statement:

Bad Debts account for receivables as in the year 2019-

Particulars	Dr. Amount	Cr. Amount
Allowance for a doubtful account	$2600
Bad Debit account	$33400
To write off uncollectible accounts		$36000

The closing balance of Allowance for doubtful account 2019

So,

In this section, an assumption for the Uncollectible sales for 2019 is taken to be at 2.25% of the entire sales made in the year.

Therefore,

Uncollectible sales for 2019 would be 2.25% of 1,500,000 = $33,750

2019 Allowance for a doubtful account will be as follows-

Journal of M/s IFP for the year 2019

Particulars	Dr. Amount	Cr. Amount
Allowance for a doubtful account ( beginning balance )		$62,600
To Uncollectible sales	$33750
Allowance for a doubtful account ( closing balance )	$28850
(Being the amount of doubtful debts marked with the balance of uncollected sales, the balancing figure transferred to the closing amount of doubtful account at an assumption of 2.25%)

Bad debt account

Bad Debts account for receivables as in the year 2019 after the assumption of 2.25% of the sales are regarded:

Allowance for a doubtful account	$28850
Bad Debit account	$7150
written off uncollectible accounts		$36000

There will be a drastic change in the bad debt account which will be plunged to 7150 USD from case 1. The change noted will be highly impactful in the overall accounts as a drastic change in the amount of bad debts is noted of the assumption of 2.25% is considered in the calculations of the receivables.

• Table showing the amount of receivables that the company would gain:

Balance	Age of Receivable	Estimated % Uncollectible	Calculation for DD
$253,000	Under 30 days	0.80%	$2,024
114,000	30-60 days	2.00%	2280
93,000	61-120 days	5.00%	4650
61,000	121-240 days	20.00%	12200
35,000	241-360 days	35.00%	12250
19,000	Over 360 days	60.00%	11400
		Total	$44,804

The closing balance of Allowance for doubtful account 2019

So,

Uncollectible sales for 2019 would be 2.25% of 1,500,000 = $44,804

2019 Allowance for a doubtful account will be as follows

Journal of M/s IFP for the year 2019

Particulars	Dr. Amount	Cr. Amount
Allowance for a doubtful account ( beginning balance )		$62,600
To Uncollectible sales	$44804
Allowance for a doubtful account ( closing balance )	$17796
(Being the amount of doubtful debts marked with the balance of uncollected sales, the balancing figure transferred to the closing amount of doubtful account)

Bad debt account

The below presented accounts shows the amount of bad debts that the company has to write in their final financial accounts

Bad Debts account for receivables as in the year 2019-

Particulars	Dr. Amount	Cr. Amount
Allowance for a doubtful account	$17796
Bad Debts account	$18204
Written off uncollectible accounts		$36000

From the above journal entry, it can be noted that a very huge change will be observed by the company if the bad debts are recorded using this. A drastic increase is also noted in this as the amount of bad debts will rise, thus this would impact in overall decrease of the amount of the receivables that the company has in the original amount of receivables.

Looking at all the analysis it is suggested to go for the Aging of Receivables Method as it is more beneficial for them because then they will have less amount in DD which leads to less bad debt account too. However, the competitors have 2.25 DD for its account it would be great to learn from the competition as what they are doing to keep it low.

The amount of bad debts has to be chosen wisely by the company, as this in long term regarded as the loss that the company has gained from. Ageing the receivables method should be utilized that would deliver the best amount that a person has to collect from the overall receivables. It should also be seen that company shall recover the amount of receivables at the earliest possible time.

Receivables are an asset to the company, for which the services are already provided by the company. Thus this amount is owned by the people to the company and the receivables shall be treated and recovered within specific times. If the delay is caused then the amount of bad debts may rise.

PART B: INVENTORY

Inventory is referred to as the stock that the company has of its goods. No business can run without an appropriate stock of inventory. The valuation of inventory can be done using various distinct methods, the following are the methods used for the valuation of inventory. The best alternative is chosen from the used valuation methods.

1. LIFO- Last in First Out method table for ascertaining the Cost of Goods Sold. The LIFO table is presented here to ascertain the value and the profits that IFP will earn in 2019 if they continue to adopt the LIFO method. This method states that the inventory of goods that the company is purchasing at the end will be sold at the first. This is sometimes resulting in the deteriorationof the stock that was purchased for the very first time.

LIFO Table:

Month	Purchase	Sales	Balance
	Unit	Rate	Amount	Unit	Rate	Amount	Unit	Rate	Amount
	A	B	C	D	E	F	G	H	I
Opening Balance	–	–	–	–	–	–	300	42	12600
January	900	44.50	40050	900	44.50	40050	300	42	12600
February	300	45.15	13545	300	45.15	13545	–	–	–
				100	42	4200	200	42	8400
March	6500	45.50	295750	5200	45.50	236600	200	42	8400
							1300	45.50	59150
April	–	–	–	900	45.50	40950	200	42	8400
							400	45.50	18200
May	–	–	–	300	45.50	13650	200	42	8400
							100	45.50	4550
June	6000	46.10	276600	2100	46.10	96810	200	42	8400
							100	45.50	4550
							3900	46.10	179790
July	3500	46.20	161700	3200	46.20	147840	200	42	8400
							100	45.0	4550
							3900	46.10	179790
							300	46.20	13860
August	–	–	–	300	46.20	13860	200	42	8400
				1600	46.10	73760	100	45.50	4550
							2300	46.10	106030
September	–	–	–	1750	46.10	80675	200	42	8400
							100	45.50	4550
							550	46.10	25355
October	3000	47.50	142500	1250	47.50	59375	200	42	8400
							100	45.50	4550
							550	46.10	25355
							1750	47.50	83125
November	100	47.95	4795	100	47.95	4795	200	42	8400
				700	47.50	33250	100	45.50	4550
							550	46.10	45355
							1050	47.50	49875
December	400	48.25	19300	400	48.25	19300	200	42	8400
				600	47.50	28500	100	45.50	4550
							550	46.10	45355
							450	47.50	21375

Cost of goods sold = value of goods in the sale column in the above table

= (Total of column F)

= $ 907160

Closing inventory balance at the end of December if the LIFO method is adopted =

Units	Costs per unit	Value
200	42	8400
100	45.50	4550
550	46.10	25355
450	47.50	21375
Total: 1300		Total: 59680

The gross margin income, if the LIFO method is adopted, can be calculated as follows to give the proper margins that IFP will earn if they adopt the LIFO method for valuing their inventory.

Gross margin income = sales during the year– the cost of goods sold

= $2026100 – $907160

=$1118940
2. FIFO METHOD- First in First Out method refers to the sale of the goods in the order of their purchases, i.e.  First purchased goods will be sold first. This table shows the FIFO calculations for IFP and helps in ascertaining the gross margin that IFP will, earn if they will adopt the FIFO method for valuing their inventory.

FIFO Table

Month	Purchase	Sales	Balance
	Unit	Cost	Amount	Unit	Cost	Amount	Unit	Cost	Amount
	A	B	C	D	E	F	G	H	I
Opening Balance	–	–	–	–	–	–	300	42	12600
January	900	44.50	40050	300	42	12600	–	–	–
	–			600	44.50	26700	300	44.50	13350
February	300	45.15	13545	300	44.50	13350
	–			100	45.15	4515	200	45.15	9030
March	6500	45.50	295750	200	45.15	9030
	–			5000	45.50	227500	1500	45.50	68250
April	–			900	45.50	40950	600	45.50	27300
May	–			300	45.50	13650	300	45.50	13650
June	6000	46.10	276600	300	45.50	13650
	–			1800	46.10	82980	4200	46.10	193620
July	3500	46.20	161700	3200	46.10	147520	1000	46.10	46100
	–						3500	46.20	161700
August	–		–	1000	46.10	46100
				900	46.20	41580	2600	46.20	120120
September	–	–	–	1750	46.20	80850	850	46.20	39270
October	3000	47.50	142500	850	46.20	39270
				400	47.50	19000	2600	47.50	85500
November	100	47.95	4755	800	47.50	38000	1800	47.50	85500
							100	47.95	4795
December	400	48.25	19300	1000	47.50	47500	800	47.50	38000
							100	47.95	4795
							400	48.25	19300

Cost of goods sold = Total of Column F

= $ 904745

The total of the sales column is $ 904745.

Closing inventory balance at the end of the month of December

Units	Costs per unit	Value
800	47.50	38000
100	47.95	4795
400	48.25	19300
Total: 1300		Total: 62095

The gross margin that could be ascertained from the above FIFO calculations is shown hereunder:

Gross margin = Total sales- the cost of goods sold

=2026100 – 904745

= $1121355

The gross margin that IFP will earn if they adopt the FIFO method for valuing their inventory will be $ 1121355.

• WEIGHTED AVERAGE METHOD- this method uses the weighted average rate for valuing the inventories, no specific purchase rates are considered here, rather an average of the whole is taken into consideration for making the calculations and ascertaining their profit margins.

Weighted Average Table

Month	Purchase	Sales	Balance
	Unit	Cost	Amount	Unit	Cost	Amount	Unit	Cost	Amount
	A	B	C	D	E	F	G	H	I
Opening Balance	–	–	–	–	–	–	300	42	12600
January	900	44.50	40050	900	43.88	39488	300	43.88	13162
February	300	45 .15	13545	400	44.51	17804	200	44.51	8903
March	6500	45 .50	295750	5200	45.47	236444	1500	45.47	68209
April	–	–	–	900	45.47	40923	600	45.47	27286
May	–	–	–	300	45.47	13641	300	45.47	13645
June	6000	46.10	276600	2100	46.07	96747	4200	46.07	193498
July	3500	46.20	161700	3200	46.13	147616	4500	46.13	207582
August	–	–	–	1900	46.13	87647	2600	46.13	119935
September	–	–	–	1750	46.13	80728	850	46.13	39207
October	3000	47.50	142500	1250	47.20	59000	2600	47.20	122707
November	100	47.95	4795	800	47.22	37776	1900	47.22	89726
December	400	48.25	19300	1000	47.40	47400	1300	47.40	61626

The entire cost of goods can be taken as the take value that is shown in the Colum F.

Cost of goods sold = Total of column F

The total cost of goods sold is $905214.

To ascertain the value of closing inventory in this case, no specific rates are to be considered rather an average rate would be taken from all the prevailing rates.

Average Rate= 47.40 cost per unit approx

Closing inventory = 1300 units * 47.40 cost per unit approx.

= $ 61626 approx.

The profit that IFP will earn if they value the inventory suing the weighted average method, is calculated as-

Gross margin = Total sales – COGS

=   2026100 – 905214

= $ 1120886

• The profits earned by IFP under different valuation methods are:

	FIFO	LIFO	Weighted Average
Inventory	1300 units	1300 units	1300 units
Profits Earned	$ 11,21,355	$ 11,18,940	$ 11,20,886

The above table shows the profits that IFP will earn from the following methods of inventory valuation. No business will focus on valuing the inventory that will give them lower profits, rather all the companies will focus on adopting such a method that will deliver the highest profits to the company.

To IFP, the FIFO method of inventory valuation is recommended for the year 2019, as it is offering the company with the maximum profits that it can gain from the inventory and thus the company shall prepare its inventory statement using the FIFO method only. For maximum profits and better gains, the company shall adopt the FIFO method for the year 2019.

Every business is willing to operate at the maximum profitability and thus with this motive, the FIFO methods shall be chosen for making the proper valuations.

PART C – LONG-LIVED ASSETS

1. A chart summarizing how much depreciation expense will be recorded for the next three years going forward (i.e., 2020, 2021, and 2022) for the machinery that they have purchased so far if IFP continues using the current straight-line depreciation method.

The following statement shows the depreciation amount for the machinery charged over its lifetime using the straight-line method:

Year	Machine 1	Machine 2	Machine 3	Cumulative Total Depreciation
2017	$36,000	$3,600					3600
2018		$3,600	$44,000	$4,400			8000
2019		$3,600		$4,400	$71,500	$7,150	15150
2020		$3,600		$4,400		$7,150	15150
2021		$3,600		$4,400		$7,150	15150
2022		$3,600		$4,400		$7,150	15150
Total		$21,600		$22,000		$28,600	$72,200

• A chart summarizing how much depreciation expense will be recorded for the next three years going forward (i.e., 2020, 2021, and 2022) for the machinery that they have purchased so far if IFP switches to an accelerated double-declining balance depreciation method starting in 2020.  

Statement showing the amount of depreciation charged under the double-declining balance Depreciation method starting in 2020:

Double-declining balance Depreciation method starting in 2020
Year	Machine 1	Machine 2	Machine 3	Total Depreciation
2017	$36,000	$3,600					$3,600
2018	$32,400	$3,600	$44,000	$4,400			$8,000
2019	$28,800	$3,600	$39,600	$4,400	$71,500	$7,150	$15,150
2020	$25,200	$5,040	$35,200	$7,040	$64,350	$12,870	$24,950
2021	$20,160	$4,032	$28,160	$5,632	$51,480	$10,296	$19,960
2022	$16,128	$3,225.6	$22,528	$4,505.6	$41,184	$8,237	$15,968.2
Total		$23,097.6		$25,977.6		$38,553	$87,628.2

• A chart summarizing how much depreciation expense will be recorded for the next three years going forward (i.e., 2020, 2021, and 2022) for the machinery that they have purchased so far assuming that IFP continues to use the straight-line method, but changes their assumption to reflect that they expect each machine to last only for a total of five years in instead of ten years.

The table showing the amount of deprecation use the straight-line method, but changes their assumption to reflect that they expect each machine for the coming five years only-

Year	Machine 1	Machine 2	Machine 3	Total Depreciation
2017	$36,000	$3,600
2018		$3,600	$44,000	$4,400
2019		$3,600		$4,400	$71,500	$7,150
2020	$25,200	$12,600	$35,200	$11,733	$64,350	$16,088	$40,421
2021		$12,600		$11,733		$16,088	$40,421
2022				$11,733		$16,088	$27,821
Total		$36,000		$44,000		$55,413	$72,200

PART D – LEASE OR BUY

1. This question has two parts:
   1. Calculate the annual blended payment to the bank under the terms offered.

Blended Interest rate
Year	Payment	principle	Interest	Balance
2020	19,200	16,000	3200	64,000
2021	18,400	16,000	2400	48,000
2022	17,600	16,000	1600	32,000
2023	16,800	16,000	800	16,000
2024	16,000	16,000	0	0
	88,000	80,000	8000

The payment of asset that is to be made by the company at the end of the period of 5 years is about $88,000.

• Show the accounting entries for 2020 associated with acquiring and using the machine under these conditions.

Journal

Date	Particulars	Dr. Amount	Cr. Amount
1 January, 2020	Machine a/c Dr.	80,000
	To Bank Loan a/c		80,000
	(Being machinery purchased from the amount that is raised from the bank loans)
31 December, 2020	Interest a/c Dr.	3200
	To Bank Loan a/c		3200
	(Being the amount of interest paid on the raised bank loan at the end of the year)
31 December, 2020	Bank Loan a/c Dr.	16000
	To Bank a/c		16000
	(Being the amount of the installment paid to the bank towards the bank loan that was raised at the beginning of the year)

• This question has two parts:
  • Calculate the annual lease payments under the terms offered by the manufacturer.

Table showing the lease payments that are to be made y the company in the coming 5 years:

2020	8000
2021	8000
2022	8000
2023	8000
2024	8000
Residual value	16000
Total	56000

 The value of the lease that the company will pay for 5 years is about $56,000.  

• Show the accounting entries for 2020 associated with acquiring and using the machine under these conditions.

Journal

Date	Particulars	Dr. Amount	Cr. Amount
1 January, 2020	Machine a/c Dr.	80,000
	To Leasing Company a/c		80,000
	(Being machinery took on lease from the leasing company and the amount paid)
31 December, 2020	Leasing Company a/c Dr.	80,000
	To Bank a/c		80,000
	(Being the amount the leasing company paid to the bank)

• Comment on the difference between these two arrangements regarding both cash flows and financial reporting. What would you recommend to Emily and Nathan about the two financial choices they have to acquire the machine?

The greatest distinction between purchasing and renting an advantage is possession. Purchasing a benefit gives you complete possession to do what you need with it while renting any advantage just gives you brief proprietorship with limitations on what you can do with it. From the above study of leasing and purchasing, I would like to suggest that the company should go for leasing in this case as it would be much beneficial for the company to go for this. As the amount of purchase is quite high as it would involve the amount of purchasing, bank loans, and the interest amount that would be payable in this is high as compared to the leasing.

In leasing the company has to just make the payment of the installments. In purchasing the company has to go for the bank loan and pay regular interest on that for the whole period, the company has that.  At the end of the period, the total cost of the asset in the response of this is 80,000. While in the case of the lease the costs are 56,000. Thus leasing machinery is a better option rather than making the purchases of the machinery.

I would recommend that in the case of this machinery, the company should go for the option of leasing rather than purchasing the asset.

Conclusion

From the above report, it can be concluded that the company has found a various alternatives for recording all their transactions. The company has chosen the best alternatives out of all, which are profitable. Every part is solved individually and the maximum benefits from each section are chosen by the company to maximize their profitable gains and enhance their financials. In the crux, it can be said that every company chooses that option which provides it with the maximum profitability and delivers the least possible risk to the entity.

References

• Walsh, J. Accounting 101: Financial Accounting Formulas. https://study.com/academy/lesson/accounting-101-financial-accounting-formulas.html (accessed Sep 11, 2020).

• Tradegecko, Comparing different inventory valuation methods: FIFO, LIFO, and WAC. https://www.tradegecko.com/inventory-management/inventory-valuation-methods.html (accessed Sep 11, 2020).