Paris Company and Troyer Company are competing businesses. Both began operations 6 years ago and are quite

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Paris Company and Troyer Company are competing businesses. Both began operations 6 years ago and are quite similar in most respects. The current balance sheet data for the two companies are shown below.

Paris Company and Troyer Company are competing businesses. Both

You have been engaged as a consultant to conduct a review of the two companies. Your goal is to determine which of them is in the stronger financial position.
Your review of their financial statements quickly reveals that the two companies have not followed the same accounting practices. The differences and your conclusions regarding them are summarized below.
1. Paris Company has used the allowance method of accounting for bad debts. A review shows that the amount of its write-offs each year has been quite close to the allowances that have been provided. It therefore seems reasonable to have confidence in its current estimate of bad debts.
Troyer Company has used the direct write-off method for bad debts, and it has been somewhat slow to write off its uncollectible accounts. Based upon an aging analysis and review of its accounts receivable, it is estimated that $20,000 of its existing accounts will probably prove to be uncollectible.
2. Paris Company has determined the cost of its merchandise inventory on a LIFO basis. The result is that its inventory appears on the balance sheet at an amount that is below its current replacement cost. Based upon a detailed physical examination of its merchandise on hand, the current replacement cost of its inventory is estimated at $517,000.
Troyer Company has used the FIFO method of valuing its merchandise inventory. Its ending inventory appears on the balance sheet at an amount that quite closely approximates its current replacement cost.
3. Paris Company estimated a useful life of 12 years and a salvage value of $30,000 for its plant and equipment. It has been depreciating them on a straight-line basis.
Troyer Company has the same type of plant and equipment. However, it estimated a useful life of 10 years and a salvage value of $10,000. It has been depreciating its plant and equipment using the double-declining-balance method.
Based upon engineering studies of these types of plant and equipment, you conclude that
Troyer€™s estimates and method for calculating depreciation are the more appropriate.
4. Among its current liabilities, Paris has included the portions of long-term liabilities that become due within the next year. Troyer has not done so.
You find that $16,000 of Troyer€™s $80,000 of long-term liabilities are due to be repaid in the current year.

Instructions
(a) Revise the balance sheets presented above so that the data are comparable and reflect the current financial position for each of the two companies.
(b) Prepare a brief report to your client stating yourconclusions.

Ending Inventory
The ending inventory is the amount of inventory that a business is required to present on its balance sheet. It can be calculated using the ending inventory formula                Ending Inventory Formula =...
Financial Statements
Financial statements are the standardized formats to present the financial information related to a business or an organization for its users. Financial statements contain the historical information as well as current period’s financial...
Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...
Balance Sheet
Balance sheet is a statement of the financial position of a business that list all the assets, liabilities, and owner’s equity and shareholder’s equity at a particular point of time. A balance sheet is also called as a “statement of financial...
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Financial Accounting

ISBN: 978-0470507018

7th Edition

Authors: Jerry J. Weygandt, Paul D. Kimmel, Donald E. Kieso

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