Issues in Accounting Essay example

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ISSUES IN ACCOUNTING EDUCATION
Vol. 26, No. 4
2011
pp. 797–806

American Accounting Association
DOI: 10.2308/iace-50053

Home Heaters: A Holistic View of the
Financial Statements
M. Cathy Claiborne and Kirkland A. Wilcox
ABSTRACT: In this case, two start-up companies in the same industry have identical economic transactions. Although both companies follow generally accepted accounting principles (GAAP), each manager makes different choices and estimates when applying
GAAP. By preparing the financial statements, calculating ratios, and comparing and contrasting the two companies, students see how choices and estimates made by management affect the financial statements. They also see the challenge faced by users of financial
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Requirement
Record these 12 transactions for Eads’s and Glenwood’s first year of operations before going to
Part B. Exhibit 1 contains a basic chart of accounts. Note: you will not use all accounts in this part of the case.
PART B
It is now December 31, and each manager must make several decisions.
1. Each manager must estimate the amount of accounts receivable that will probably not be collected. They make the following estimates:
Glenwood Heating, Inc.: The manager estimates that 1 percent of ending accounts receivable will be uncollectible.
Eads Heaters, Inc.: The manager estimates that 5 percent of ending accounts receivable will be uncollectible.
Issues in Accounting Education
Volume 26, No. 4, 2011

Home Heaters: A Holistic View of the Financial Statements

799

EXHIBIT 1
Home Heaters
Chart of Accounts
Asset Accounts
Cash
Accounts receivable
Allowance for bad debts
Inventory
Land
Building
Accumulated depreciation, building
Equipment
Accumulated depreciation, equipment
Leased equipment
Accumulated depreciation, leased equipment
Liability Accounts
Accounts payable
Interest payable
Note payable
Lease payable
Equity Accounts
Common stock
Retained earnings
Dividends
Sales
Cost of goods sold
Bad debt expense
Depreciation expense
Interest expense
Other operating expenses
Rent expense
Provision for income taxes

2. Neither manager recorded cost of goods sold at the time of
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