Question

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.”

Calculate the after tax effect on income of the change suggested by the controller. Assume the tax rate is 40%. Be sure to include this information in your initial post.

Answer 1

The controller has allowance for uncollectible accounts was $180,000, with the change in aging category done by the controller the amount of total allowance for uncollectible accounts of $180,000 decreased to $135,000. The reduction in the amount of allowance for uncollectible, the net income of the organisation will increase and as increase the net income lead to the increase in the amount of tax.

So amount of tax will increase on the income due the change suggested by the controller.