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bulgar [2K]
3 years ago
8

You have recently been hired as the assistant controller for Stanton Industries. Your immediate superior is the controller who,

in turn, reports to the vice president of finance. The controller has assigned you the task of preparing the year-end adjustments. For receivables, you have prepared an aging of accounts receivable and have applied historical percentages to the balances of each of the age categories. The analysis indicates that an appropriate balance for Allowance for Uncollectible Accounts is $180,000. The existing balance in the allowance account prior to any adjustment is a $20,000 credit balance. After showing your analysis to the controller, he tells you to change the aging category of a large account from over 120 days to current status and to prepare a new invoice to the customer with a revised date that agrees with the new aging category. This will change the required allowance for uncollectible accounts from $180,000 to $135,000. Tactfully, you ask the controller for an explanation for the change and he tells you, "We need the extra income; the bottom line is too low."
Required:
1. What is the effect on income before taxes of the change requested by the controller?
2. Discuss the ethical dilemma you face. Consider your options and responsibilities along with the possible consequences of any action you might take.
Business
1 answer:
Nata [24]3 years ago
5 0

Answer:

Answer is given below.

Explanation:

it is absolutely exploitative to adjust the maturing of the records receivable with no legitimate explanation so as to diminish the remittance made so as to expand the benefit and show an off base monetary record figures to the partners. The controller can't subjectively choose to change the records receivable to cut down the noncollectable records as at some point or another a similar will be found during review and a similar will be hailed off as a fake. The long haul results you would confront incorporate landing terminated from the position, having your authorized dropped in the event that you are CPA and may likewise confront lawful prosecutions. You should disclose to the controller that so as to simply introduce a decent benefit for the present year it can place into the danger for the future and put their vocation in question. Additionally, a similar won't be valued by the investors and the organization may go on free its altruism.

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At the beginning of 2021, Brad’s Heating & Air (BHA) has a balance of $24,800 in accounts receivable. Because BHA is a priva
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  • 3. Calculate bad debt expense for 2021 and 2022 under the allowance method and under the direct write-off method, prior to any adjusting entries.
  • 2021

Under the Allowance Method    

Dr Bad Debt Expense $ 5.960  

Cr Allowance for Uncollectible Accounts  $ 5.960

Under the Direct Write-Off Method    

There aren't movements of writen-off accounts.

  • 2022

In 2022, customers’ accounts totaling $6,800 are written off as uncollectible.

Under the Direct Write-Off Method    

Dr Bad Debt Expense $ 6.800    

Cr Accounts Receivable   $ 6.800  

Under the Allowance Method    

3. Calculate bad debt expense for 2022 under the allowance method  

Dr Bad Debt Expense $ 5.440  

Cr Allowance for Uncollectible Accounts  $ 5.440

Explanation:

  • Initial Balance  

Dr Accounts Receivable   $ 24.800

  • During 2021, install air conditioning systems on account  

Dr Accounts Receivable  $ 178.000  

Cr Sales  $ 178.000

  • During 2021, collect $173,000 from customers on account.    

Dr Cash $ 173.000  

Cr Accounts Receivable   $ 173.000

  • 3. At the end of 2021, estimate that uncollectible accounts total 20% of ending accounts receivable.    

Dr Bad Debt Expense $ 5.960  

Cr Allowance for Uncollectible Accounts  $ 5.960

  • FINAL Balance 2021  

Dr Accounts Receivable  $ 29.800  

Cr Allowance for Uncollectible Accounts  $ 5.960

  • 4. In 2022, customers’ accounts totaling $6,800 are written off as uncollectible. Under the Allowance Method  

Dr Allowance for Uncollectible Accounts $ 6.800  

Cr Accounts Receivable   $ 6.800

  • 4. In 2022, customers’ accounts totaling $6,800 are written off as uncollectible. Under the Direct Write-Off Method  

Dr Bad Debt Expense $ 6.800  

Cr Accounts Receivable   $ 6.800

  • Sub TOTAL Balance 2022  

Dr Accounts Receivable  $ 23.000  

Dr Allowance for Uncollectible Accounts  $ 840

  • 3. Calculate bad debt expense for 2022 under the allowance method  

Dr Bad Debt Expense $ 5.440  

Cr Allowance for Uncollectible Accounts  $ 5.440

  • FINAL Balance 2022  

Dr Accounts Receivable  $ 23.000  

Cr Allowance for Uncollectible Accounts  $ 4.600

If the company applies the allowance method, it means that the account Allowance for Uncollectible Accounts must show as balance the % of accounts receivables as CREDIT.

Because the company has a debit balance in that account it's necessary to register an entry that compensate the DEBIT value and reflect A CREDIT estimated as % of account receivable.

Bad accounts are those credits granted by the company and there is no possibility of being charged.

When customers buy products on credits but the company cannot collect the debt, then it's necessary to cancel the unpaid invoice as uncollectible.

One way is to directly cancel bad debts at the time it was decided that the credit is bad, the total amount reported as bad debt expenses negatively affect the income statement and the accounts receivable are reduced by the same amount, less assets

The other way is to determine a percentage of the total amount of accounts receivable as bad debts, there are many ways to analyze accounts receivable and calculate the value of bad debts.

When the company has the percentage of uncollectible accounts, the required journal entry is Bad Expenses (debit) with Reserve for Bad Accounts (credit)

At the time of cancellation, since the expenses were recognized before, we only use the Allowance for Uncollectible Accounts (Debit)  with accounts receivable (credit), with this we are recognizing the bad credit of the company.

5 0
3 years ago
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