Question: It is February 16 2011 and you are auditing the

It is February 16, 2011 and you are auditing the Davenport Corporation’s financial statements for 2010 (which will be issued in March 2011). You read in the newspaper that Travis Corporation, a major customer of Davenport, is in financial difficulty. Included in Davenport’s accounts receivable is $50,000 (a material amount) owed to it by Travis. You approach Jim Davenport, president, with this information and suggest that a reduction of accounts receivable and recognition of a loss for 2010 might be appropriate. Jim replies, “Why should we make an adjustment? Ted Travis, the president of Travis Corporation, is a friend of mine; he will find a way to pay us, one way or another. Furthermore, this occurred in 2011, so let’s wait and see what happens; we can always make an adjustment later this year. Our 2010 income and year-end working capital are not that high; our creditors and stockholders wouldn’t stand for lower amounts than they already are.”

From financial reporting and ethical perspectives, prepare a response to Jim Davenport regarding this issue.

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