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 Uncollectable 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 uncollectable 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.”
1. Calculate the after tax effect on income of the change suggested by the controller. Assume a 35% tax rate.
2. Discuss the accounting issues at hand. What type of system does this company currently utilize to estimate uncollectables? Under this system, how does the current balance in the Allowance account affect your periodic journal entry?