Financial Accounting
4th Edition
ISBN: 9781259307959
Author: J. David Spiceland, Wayne M Thomas, Don Herrmann
Publisher: McGraw-Hill Education
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Chapter 5, Problem 5.8APEM
Earnings Management
Ernie Upshaw is the supervising manager of Sleep Tight Bedding. At the end of the year, the company’s
Accounts receivable $500,000
Estimated percent uncollectible 9%
Allowance for uncollectible accounts $20,000 (debit)
Operating income $320,000
In the previous year, Sleep Tight Bedding reported operating income (after adjustment) of $275,000. Ernie knows that it’s important to report an upward trend in earnings. This is important not only for Ernie’s compensation and employment, but also for the company’s stock price. If investors see a decline in earnings, the stock price could drop significantly, and Ernie owns a large amount of the company’s stock. This has caused Ernie many sleepless nights.
Required:
1. Record the adjustment for uncollectible accounts using the accounting manager’s estimate of 9% of accounts receivable.
2. After the adjustment is recorded in Requirement 1, what is the revised amount of operating income? Does operating income increase or decrease compared to the previous year?
3. Ernie instructs the accounting manager to record the adjustment for uncollectible accounts using 4% rather than 9% of accounts receivable. After this adjustment, does operating income increase or decrease compared to the previous year?
4. By how much would total assets and expenses be misstated using the 4% amount?
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Students have asked these similar questions
Jinx Company provided the following information for the current year in relation to accounts receivable:
Accounts receivable, January 1 1,300,000Credit sales 5,500,000Sales return 150,000Accounts written off 100,000Collections from customers 5,000,000Estimated future sales return on December 31 50,000Estimated uncollectible accounts per aging at year-end 250,000
What amount should be reported as net realizable value of accounts receivable on December 31?
Indiana Bones, Inc., has the following account balances at the end of the year before adjustments:
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$60,000
Allowance for Doubtful Accounts
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Doubtful Accounts Expense
0
Management estimates that 11% of accounts receivable will be uncollectible. After the correct adjusting entry has been made, Doubtful Accounts Expense on the income statement for the year equals:
Current Attempt in Progress
The ledger of Cullumber Company at the end of the current year shows Accounts Receivable $68,000, Credit Sales $810,000, and
Sales Returns and Allowances $38,000. Prepare journal entries for each separate scenario below.
If Cullumber Company uses the direct write-off method to account for uncollectible accounts, journalize the adjusting
entry at December 31, assuming Cullumber Company determines that Matisse's $500 balance is uncollectible.
(a)
If Allowance for Doubtful Accounts has a credit balance of $900 in the trial balance, journalize the adjusting entry at
December 31, assuming bad debts are expected to be 8% of accounts receivable.
(b)
If Allowance for Doubtful Accounts has a debit balance of $490 in the trial balance, journalize the adjusting entry at
December 31, assuming bad debts are expected to be 7% of accounts receivable.
(c)
(Credit account titles are automatically indented when amount is entered. Do not indent manually.)
No. Account Titles…
Chapter 5 Solutions
Financial Accounting
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