Humanity International sells medical and food supplies to those in needs in underdeveloped countries. Customers in these countries are often very poor and must purchase items on account. At the end of 2015, total accounts receivable equal $1,300,000. The company understands that it’s dealing with high credit risk clients. These countries are often in the middle of a financial crisis, civil war, severe drought, or some other difficult circumstance. Because of this, Humanity International typically estimates the percentage of uncollectible accounts to be 35% (= $455,000). Actual write-offs in 2016 total only $300,000, which means that the company significantly overestimated uncollectible accounts in 2015. It appears that efforts by the International Monetary Fund (IMF) and the United Nations (UN), and a mild winter mixed with adequate spring rains, have provided for more stable economic conditions than were expected, helping customers to pay on their accounts.
1. Record the adjustment for uncollectible accounts at the end of 2015, assuming there is no balance in Allowance for Uncollectible Accounts at the end of 2015 before any adjustment.
2. By the end of 2016, Humanity International has the benefit of hindsight to know that estimates of uncollectible accounts in 2015 were too high. How did this overestimation affect the reported amounts of total assets and expenses at the end of 2015? Ignore tax effects.
3. Should Humanity International prepare new financial statements for 2015 to show the correct amount of uncollectible accounts? Explain.