Ed Hanson is the controller of Casey’s Collectibles. The business uses the accrual method of accounting and recognizes sales revenue in the period in which the sale is made. As a result, the Accounts Receivable balance at year-end was $92,480, which was net of the Allowance for Doubtful Accounts of $1,260. Ed was completing the year-end financial statements for the business to apply for a much needed business loan when he saw a letter from a district court. The letter was to inform him as controller of Casey’s Collectibles that Charlie Smith had declared bankruptcy. As it turned out, Charlie was Casey’s Collectibles’ largest customer and his account receivable balance was $24,295, which the bankruptcy notification letter stated was never going to be paid. When Ed looked over the account receivable aging schedule he saw that Charlie's account was more than 90 days past due, and even though Ed had been suspicious, he still hoped that Charlie would pay his account balance. Ed looked at his balance sheet and thought that if he wrote off Charlie’s account, the bank would become concerned about all of the accounts receivable listed. He then thought that had he not been so quick to open the mail, he would have not known that Charlie was bankrupt, and the balance sheet he was about to present to the bank would be fine. Knowing how potentially damaging this new information could be, Ed decided to just ignore it for the moment and simply go ahead with the balance sheet he had originally planned to give to the bank.
Should Ed provide the bank with a new balance sheet that reflects this new information? Would Ed have been fine with the original balance sheet had he simply waited to open his mail? Are any ethical issues involved with updating financial statement information for subsequent events? Did Ed not properly use the allowance method as he only had a balance for doubtful accounts totaling $1,260? Would Ed need to inform the bank had the bankruptcy letter been from a customer with an account receivable balance of $120?

  • CreatedJuly 08, 2015
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