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Garrow Corporation (B)
Author(s):
Reece, James S.
Functional Area(s):
   Financial Accounting
Setting(s):
   For Profit
Difficulty Level: Intermediate
Pages: 2
Teaching Note: Not Available. 
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First Page and the Assignment Questions:

In addition to the transactions listed in Garrow Corporation (A), several other matters were referred to Mr. Burrows for his opinion as to how they should be reported on the 2004 income statement and balance sheet.

  1. Garrow had purchased advertising brochures costing $125,000 in 2004. At the end of 2004, one fifth of these brochures were on hand; they would be mailed in 2005 to prospective customers who sent in a coupon request for them. As of March 1, 2005, almost all the brochures had been mailed. Garrow had charged $100,000 of the cost of these brochures as an expense in 2004, and showed $25,000 as a deferred charge as of December 31, 2004.
  2. In 2004, the company had placed magazine advertisements, costing $75,000, offering these brochures. The advertisements had appeared in 2004. Because the sales generated by the brochures would not occur until after prospective customers had received the brochures and placed orders, which would primarily be in 2005, Garrow had recorded the full $75,000 as a deferred charge on its December 31, 2004, balance sheet.
  3. Garrow’s long-standing practice was to capitalize the costs of development projects if they were likely to result in successful new products. Upon introduction of the product, these amounts were written off to cost of sales over a five-year period. During 2004, $46,000 had been added to the asset account and $30,000 had been charged off as an expense. Preliminary research efforts were charged to expense, so the amount capitalized was an amount that related to products added to Garrow’s line. In the majority of instances, these products at least produced some gross profit, and some of them were highly successful.
  4. In 2004, the financial vice president decided to capitalize, as a deferred charge, the costs of the company’s employee training program, which amounted to $29,000. He had read several books and articles on “human resource accounting” that advocated such treatment because the value of these training programs would certainly benefit operations in future years.
  5. For many years, Garrow’s practice had been to set its allowance for doubtful accounts at 2 percent of accounts receivable. This amount had been satisfactory. In 2004, however, a customer who owed $19,040 went bankrupt. From inquiries made at local banks, Garrow Company could obtain no reliable estimate of the amount that eventually could be recovered. The loss might be negligible, and it might be the entire $19,040. The $19,040 was included as an account receivable on the proposed balance sheet.
  6. Garrow did not carry fire or theft insurance on its automobiles and trucks. Instead, it followed the practice of self-insurance. It charged $5,000 as an expense in 2004, which was the approximate cost of fire and theft insurance policies, and credited this amount to an insurance reserve, a noncurrent liability. During 2004, only one charge, for $3,750, was . . .

Assignment

  1. What changes in the financial statements (see Garrow Corporation (A)) is Garrow required to make in accordance with generally accepted accounting principles? Ignore income taxes and assume that all the transactions are material.
  2. As Mr. Burrows, what additional changes,if any, would you recommend be made in the proposed income statement in order to present the results more fairly?