Question

AP5-5 Ethics 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 categones. 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." Required: 1. Understand the reporting effect: What is the effect on income before taxes of the change requested by the controller? ces Income before taxes 2. Specify the options: If you do not make the change, how would the additional $45.000 of Allowance for Uncollectible Account affect total assets? by

Answer 1

1)

	As per Analysis	As per controller	change
Balance at end	180000	135000
less:Un-adjusted Balance in allowance account	-20000	-20000
Bad debt expense	160000	115000	45000

Income before taxes will increase by 45000   .As lower Bad debt expense is booked resulting in Higher income before taxes .

2)Total asset is decreased or Understated by 45000 if no changes is undertaken .Since allowance for doubtful account is a contra asset which is shown by way of subtraction from accounts receivable (asset) ,So if higher amount is subtracted ,receivables will decreased and so as total asset.

3a)yes,The controller has no logic as to reduction in required balance in allowance account from 180000 to   135000 and in such case financial statement does not reflect true picture of profitability and financial position of organization.

3b)No.One must work with ethics so that organization goals are achieved efficiently and effectively.