Johan Company and Nordlund Company are competing businesses that follow ASPE. Both began operations six years ago and they are quite similar. The current balance sheet data for the two companies are as follows:

You have been hired as a consultant to do a review of the two companies. Your goal is to determine which one is in a stronger financial position. Your review of their financial statements quickly reveals that the two companies have not followed the same accounting policies. The differences, and your conclusions, are summarized below: 

1. Johan Company has had good experience in estimating its uncollectible accounts. A review shows that the amount of its write-offs each year has been quite close to the allowances the company provided. Nordlund Company has been somewhat slow to recognize its uncollectible accounts. Based on an aging analysis and review of its accounts receivable, it is estimated that $20,000 of its existing accounts will become uncollectible. 

2. Johan Company has determined the cost of its merchandise inventory using the weighted average inventory cost formula. The result is that its merchandise inventory appears on the balance sheet at an amount that is slightly above net realizable value. Based on a detailed physical examination of its merchandise on hand, the net realizable value of its merchandise inventory is estimated at $459,300. Nordlund Company has used the FIFO inventory cost formula. The result is that its ending merchandise inventory appears on the balance sheet at net realizable value. 

3. Johan Company estimated a useful life of 12 years and a residual value of $30,000 for its items of property, plant, and equipment, and has been depreciating them on a straight-line basis. Nordlund Company has the same type of property, plant, and equipment. However, it estimated a useful life of 10 years and a residual value of $10,000. It has been depreciating its property, plant, and equipment using the double diminishing-balance method. Based on engineering studies of these types of property, plant, and equipment, you conclude that Nordlund’s estimates and method for calculating depreciation are more appropriate.

Instructions 

a. Where would you find the above information on the two companies’ accounting policies? Be specific about what information would be available and where you would find it. 

b. Using appropriate accounting policies, prepare revised balance sheets for both companies. 

c. Has preparing the revised statements in part (b) improved the quality of the financial information for the two companies? If so, how?  

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Cash Accounts receivable Allowance for doubtful accounts Merchandise inventory Property, plant, and equipment Accumulated depreciation Total assets Current liabilities Non-current liabilities Total liabilities Owner's equity Total liabilities and owner's equity Johan Company $ 70,300 309,700 (13,600) 463,900 255,300 (112,650) $972,950 $440,200 78,000 518,200 454,750 $972,950 Nordlund Company $ 48,400 312,500 0 520,200 257,300 (189,850) $948,550 $436,500 80,000 516,500 432,050 $948,550