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• W371346277 abstract "ABSTRACT Practicing accountants commonly apply judgment when computing financial statement numbers. However, intermediate accounting textbooks rarely discuss judgment, leaving accounting students with the erroneous impression that accounting computations each have right answer. The purpose of this paper is to correct that impression with examples of how judgment is applied to the reporting of accounts receivable. The background reading describes factors affecting the collectibility of accounts receivable, and a group class exercise has students apply judgment to compute allowance account balances. Students discover that correctly applied judgment may lead to multiple right answers. This exercise focuses on the allowance account balance because the calculation appears to be mechanical but is, in reality, based on the application of significant judgment. Instructors can easily incorporate this material into their intermediate accounting courses because the classroom exercise takes minimal class time and flows easily from traditional coverage of the allowance for doubtful accounts. FACTS Members of the group are accountants for a company (the seller) that has $4,000,000 in outstanding accounts receivable as of 12/31/20X1 (its fiscal year end). The group must compute the ending balance in the allowance for doubtful accounts (i.e. the amount of the $4,000,000 expected to be uncollectible) for presentation on the 12/31/20X1 balance sheet. The balance sheet will show the following: The seller used the Percentage of Receivables method and a four percent estimated default rate in each of the last five years (up through 12/31/20X0). Each year, the estimated default rate proved highly accurate; four percent of the receivables actually were uncollectible and were written off. If the group uses a four percent default rate for the year 20X1, it would obtain an allowance balance of $160,000 and, thus, net accounts receivable of $3,840,000. The group has information (one of the situations below) about the collectability of the 12/31/20X1 receivables. Based on the facts given and on assumptions the group needs to make, apply judgment to estimate an allowance balance. The balance should measure the dollar amount of uncollectible receivables as accurately as possible. Assume all amounts are material. Situation #1: Industry Concentration ABC Airline Company is a major customer, and ABC owes the seller $1,000,000 of the $4,000,000 total accounts receivable. On 12/10/20X1, a major event occurred. Since then, the number of passengers flying with ABC declined by 50 percent relative to the rest of the year. Assume that the product cannot be repossessed from ABC and assume the default rate for the seller's other customers will be the same as in prior periods. Situation #2: Collection Efforts As stated above, the historical default rate has been four percent for each of the last five years. The seller's management establishes an internal collection agency to reduce the default rate for current (i.e. 12/31/20X1) and future receivables. The new agency will include the four people who were previously responsible for collections and four new people hired specifically for this purpose. The new collection agency begins operations on 1/2/20X2. (Note: The 12/31/X1 account receivables will be collected in the year 20X2. Thus, the default rate should be estimated based on the new collection procedures). Assume that the product cannot be repossessed from the customers. Situation #3: Collateral Recovery The seller sells private airplanes to individuals. Assume each customer pays for the airplane over a three-year period. On 12/22/20X1, the group learns that one customer has serious financial problems. This customer purchased a custom airplane on 1/20/20X1 for $1,500,000 and still owes the seller $1,000,000. (This $1,000,000 is included in the $4,000,000 accounts receivable balance. …" @default.
• W371346277 created "2016-06-24" @default.
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• W371346277 date "2011-01-01" @default.
• W371346277 modified "2023-09-28" @default.
• W371346277 title "Using Judgment to Measure the Allowance for Doubtful Accounts" @default.
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