Question

Scenario: You've just been hired as the assistant treasurer of a specialty retail chain of nine stores. Your main responsibility is to maintain the company's high credit rating by paying all bills when due and taking advantage of all cash discounts.

Your manager instructs you to continue preparing all checks "net of discount" and dating the checks the last day of the discount period. "But", he continues, "we always hold the checks for at least four days beyond the discount period before mailing them. That way we get another four days of interest on our money. Most of our creditors need our business and don't complain. If they do complain, we blame it on the mail room or the post office. We've only lost one discount of every hundred we take this way; I think everybody does it."

Discussion Requirements:

1. What are the ethical considerations in this situation?

2. Who are harmed or benefited?

3. Should you continue the prior practice regarding taking purchase discounts?

Answer 1

Requirement 1
Transaction	General Journal	Debit	Credit
i	Bad debt expense	$     6,000.00
	Allowance for Doubtful Accounts		$     6,000.00
	(To Record Adjusting Entry at Year end)
ii	Bad debt expense	$           3,200
	Allowance for Doubtful Accounts		$          3,200
	(To Record Adjusting Entry at Year end)
iii	Bad debt expense	$           5,613
	Allowance for Doubtful Accounts		$           5,613
	(To Record Adjusting Entry at Year end)
Working :
i	Bad debts are estimated @ 4% of Net sales
	$600000*1%	$     6,000.00
b	Bad debts are estimated 4% of gross AR
	80000*4%	$           3,200
c	Allowance is 5% of net Accounts Receivable
	unadjusted Balance	$           1,700	credit
	Estimated Balance (80000-1750)*5%	$           3,913	Credit
		$           5,613	Credit