Mini-Case # 1 You are the owner of a lawn service company (Grass Man). Your slog
ID: 2420361 • Letter: M
Question
Mini-Case # 1
You are the owner of a lawn service company (Grass Man). Your slogan is, “Who is that Grass Man?” Your company provides grounds and maintenance services to a range of corporate customers. Customers are expected to pay on the first of each month, in advance of receiving services. One of your corporate customers is an eldercare facility whose grounds you have maintained for many years. The customer has not paid for the last three months of service (from October through December of 2015); nevertheless, to maintain a positive relationship, your company continued to provide mowing and weed control services to the eldercare facility during that time. Your company stopped providing services in January of 2016 and found out in that same month that the eldercare facility filed for bankruptcy in September of 2015. Your company now believes that collection of the missed payments is extremely unlikely.
Your company has already issued financial statements to lenders (for the period ending 12/31/2015) which reflected revenue and a corresponding account receivable related to this customer of $10,000 per month for services that your company provided to the eldercare facility. Those financial statements also reflected the company’s standard allowance (reserve) amount on receivables, of 4% of sales. In total, your company’s average monthly sales amount to $500,000.
Evaluate whether finding out about your client’s bankruptcy indicates that you have a change in accounting estimate or an error in previously issued financial statements. Describe the accounting treatment (as required by the Codification) that appears to be more appropriate given the circumstances. State any assumptions that you make in reaching your conclusion. Make sure to use in-text citations and references for the parts of the Codification that you use, and explain your recommendation.
Explanation / Answer
As on the date of the balance sheet, there is no circumstances of occurence of bad debts. So there is no need to take the effect of the occurence of bad debts on the financial statement of 31.12.2015. As stated in the question, the company had already made allowance reserve, in which the amount of 4% of the sale is transferred i.e.$500000*4/100= $20000 p.m. The amount of bad debts is $10000*3 = $30000. So the company had already made provision for the future losses due to bad debts. Hence there is no error in the previosly issued financial statements.
In the next fianancial year, the bad debts amounting to $30000 will be written off from the allowance reaserve