Question

Bud Lighting Co. is a retailer of commercial and residentail lighting products. Gowen Geter, the company's chief accountant, is in the process of making year-end adjusting entries for uncollectible accounts receivable. In recent years, the company has experienced an increase in accounts that have become uncollectible. As a result, Gown beleives that the company should increase the percentage used for estimating doubtful accounts from 2% to 4% of credit sales. This change will significantly increase bad debt expense, resulting in a drop in earnings for the first time in company history. The company president, Tim Burr, is under considerable pressure to meet earnings goals. He suggest that this is "not the right time" to change the estimate. He instructs Gowen to keep the estimate at 2%. Gowen is confident that 2% is too low, but he follows Tim's instructions.

Required: (3-4 sentences each)

1. Discuss the decision to use the lower percentage to improve earnings. How does this work?

2. Is Tim acting in an ethical manner?

3. What other measures could the company president use to ensure the percentage of uncollectible accounts remains close to 2%?

Answer 1

Ans1) Bud Lighting co. decision to use the lower percentage of bad debt it will reduce the total expenses of current year and this increase all overall earning of the organisation. It will also increase organisation organisation borrowing capacity because banks mainly provide credit facility to those customer which have lower bad debts.This show organisation have effective and efficient sales team.

Ans2) No tim is not acting in an ethical manner because it is the responsibility of an organisation to disclose true and correct view of its financial statement to his stakeholers(i.e shareholers, investor, banks etc).

Ans3) The company president should take following measure to maintain bad debt close to 2% are:

a)check customer creditworthiness and set effective credit limits before sale.

b)provide reasonable discounts to customer.

c) Solve customer query as soon as possible

d) Build effective sale team.

e) provide timely remainders to customer.