Post First Discussion) Week 11 Discussion Forum- Accounts Receivable Please resp
ID: 2514831 • Letter: P
Question
Post First Discussion) Week 11 Discussion Forum- Accounts Receivable Please respond to the following questions. You will not be able to view the others' responses until you make your initial post. Please follow up by responding to other student's replies once you have made your initial post. Number your answers to correspond with my questions. Thanks! Here is the situation: Max Motors is a small, privately heid corporation. They raised capital by issuing common stock to a small group of investors and by borrowing money from two local banks. At the end of 2015, the company's controller prepared an aging schedute of accounts receivable and determined that the Bad Debt Expense and Allowance for Uncollectible Accounts will require a $100,000 adjustment-. The CFO, upon learning the amount of the required adjustment, told the controller to only record $20,000 "because if we record the full $100,000 th?year, our financial statements will look bad to the investors and creditors, besides we can just play catch up" next year when our prospects improve. 1. Is the Allowance for Uncollectible Accounts actual "money set aside by the company to "cover" uncollected accounts? Why or why not? 2. Why is it important to properly value the Allowance for Uncollectible Accounts? What financial statements are affected by the estimate? 3. Is there any justification for the company's actions? 4. Who, if anyone, is harmed by the company's actions?Explanation / Answer
Ans to Part (i)
No, Max motors is failed to make adequate allowance for uncollectible accounts by putting aside the adequate money.
As per the Generally Accepted Accounting Principals (GAAP) , entity should make adequate provision for the expense/allowance of which measurement is reliably assured and having probability of future economic cash outflow. In the given situation, Max motors have estimated $ 100000 of adjustment on account of Bad Debt allowance but they are not willing to make full provision for it.
Thus only $ 20,000 has been covered and Max motors need to cover additional $ 80,000 Uncollectible amount as per GAAP.(which means whole $100000 of bad debts should be considered).
Ans to Part (ii)
An entity may not always be able to collect the assessments receivable balances owed by its members. If it is anticipated that a receivable most likely will not be collected, an allowance for doubtful accounts may be established and a bad debt expense is recorded. Bad debts typically arise as a result of a unit owner being unable to fulfill their obligation to pay an outstanding receivable balance due to the entity.
It is critically important to record bad debt expense/uncollectible amount throughout the year to follow the accrual basis of accounting. Meaning, revenue should be recognized as billed and expenses should be recognized as incurred. When unit owners are billed for their monthly maintenance assessments an entry is recorded to debit (increase) accounts receivable and credit (increase) maintenance assessments. When the unit owners remit payment for their monthly maintenance assessments, a new entry is recorded to debit (increase) cash and credit (decrease) accounts receivable. These two entries reflect the ideal situation and would not require an entry for bad debt expense. A problem arises when unit owners do not remit payment for their monthly maintenance assessments and the receivable balance grows and becomes delinquent. If the Board does not anticipate receiving payment from the unit owner, a corresponding entry to debit (increase) bad debt expense and credit (increase) the allowance for doubtful accounts should be recorded to recognize the related bad debt expense when the maintenance assessment income is recorded.
Financial statements that are effected due to uncollectibles are :
1. Statement of Profit and loss (effected with the amount to be recognize as bad debt for the year)
2. Statement of Balance Sheet (effected with the net account receivables (deducted by uncollectibles amount))
Ans to Part (iii)
No. Action of Max Motor CFO is not tenable at all and it is a federal offence as per Internal Revenue Services provision. A company is obligated to present the true and fair financial statements to its shareholders and stakeholders as it has concept of segregation of management from ownership.
It is not valid to undercutting the current year expense on account of “catching up” with next year profits as financial statements are prepared for a particular financial year and not for cumulative set of financial year. Thus it should be shown on accrual basis and financial statement should be prepared with fair point of view.
Ans to Part (iv)
Following are the effected entities/persons by company’s actions:
1. Investors
2. Bankers who lends money to company
3. Shareholders
4. Government/ IRS