You have recently been hired as the assistant controller forStanton 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 theyear-end adjustments. For receivables, you have prepared an agingof accounts receivable and have applied historical percentages tothe balances of each of the age categories. The analysis indicatesthat an appropriate balance for Allowance for UncollectableAccounts is $180,000. The existing balance in the allowance accountprior to any adjustment is a $20,000 credit balance.
After showing your analysis to the controller, he tells you tochange the aging category of a large account from over 120 days tocurrent status and to prepare a new invoice to the customer with arevised date that agrees with the new aging category. This willchange the required allowance for uncollectable accounts from$180,000 to $135,000. Tactfully, you ask the controller for anexplanation for the change and he tells you, “We need the extraincome; the bottom line is too low.”
Required:
1. Calculate the after tax effect on income of the changesuggested by the controller. Assume a 35% tax rate.
2. Discuss the accounting issues at hand. What type of systemdoes this company currently utilize to estimate uncollectables?Under this system, how does the current balance in the Allowanceaccount affect your periodic journal entry?
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