Issues in Accounting

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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 …show more content…

They decide to use the following inventory methods:
Glenwood Heating, Inc.: FIFO
Eads Heaters, Inc.: LIFO
3. Both managers determine that the expected lives and salvage values of the building and equipment owned by each company are as follows:
Expected Life
Building
Delivery Equipment

Salvage Value

30 years
8 years

$50,000
8,000

It is now time to record depreciation expense for the year. The managers decide to use the following depreciation methods:
Issues in Accounting Education
Volume 26, No. 4, 2011

Claiborne and Wilcox

800

Glenwood Heating, Inc.
Building
Delivery equipment
Eads Heaters, Inc.
Building
Delivery equipment

Straight-line
Straight-line
Straight-line
Double-declining balance (DDB)

4. On January 5, 20X1, each company negotiated the use of a large piece of operating equipment. Both managers agreed to a $16,000 payment on December 31, 20X1, at which time they would decide the terms for using the equipment in the future. On December 31, when making the payment, the managers negotiated the following terms:
Glenwood Heating, Inc.
Although the owner of the equipment agreed to let Glenwood rent the equipment for
$16,000 again next year, he would not guarantee that price past next year. Management decided to rent the equipment on a yearly basis and signed an agreement to rent it next year for $16,000.
Rental payment December 31, 20X1
Rental payment due December 31, 20X2

$16,000
$16,000

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