Answer:
XYZ
a. The Effect on Income Before Taxes of the Change of Ageing Analysis:
The Income before Taxes would be $45,000 ($180,000 - $20,000) - ($135,000 - 20,000) more than the income that should have been reported. Assuming the Income Taxes were to be based on the increased income figure, XYZ would have an increased tax liability by say $18,000 (45,000 x 40%). This reduces the Retained Earnings (or Stockholders Equity) by $18,000. The company would in actual fact, be reporting a net income of $27,000 more than it should have reported. This is very deceptive for all those who would be using the reported financial statement in making their decisions. Unfortunately, we would have showed the affected customer that we are dubious in our business practise, further jeopardizing the chance of full recovery of the debt. This is apart from taking into consideration the type of customer that would be ready to accept a revised invoice that was formerly past due.
b. The ethical dilemma is doing the right thing according to Rights Theory. We cannot say we have adhered to a set of rules (the U.S GAAP or the IFRS) when in fact we are violating an important rule of fair presentation of the elements of the financial statement.
I would try to convince the controller to rescind his suggestion and follow the rules. We understand that making allowance for uncollectibles is an estimate based on judgement. However, since we have established the basis and even stated it in the notes to the financial statements, I think that we should follow through.
Explanation:
The year's Uncollectible Expense should be $160,000 ($180,000 - $20,000). If the allowance for the year were to be adjusted from $180,000 to $135,000, it means that the Uncollectible Expense would then be $115,000 ($135,000 - $20,000). We will be under-reporting the Uncollectible Expense by a difference of $45,000 ($160,000 - $115,000), thereby boosting the net income before tax by $45,000.
