McLaughlin Corporation uses the allowance method to account for bad debts. At the end of the company's fiscal year, accounts receivable are analyzed and the allowance for uncollectible accounts is adjusted. At the end of 2011, the company reported the following amounts:
Account Receivable ........... $ 10,850,000
Less: Allowance for uncollectible Accounts ... (450,000)
Accounts receivable, net ........ $ 10,400,000

In 2012, it was determined that $1,825,000 of year-end 2011 receivables had to be written off as uncollectible. This was due in part to the fact that Hughes Corporation, a long-standing customer that had always paid its bills, unexpectedly declared bankruptcy in 2012. Hughes owed McLaughlin $1,400,000. At the end of 2011, none of the Hughes receivable was considered uncollectible.

Describe the appropriate accounting treatment and required disclosures for McLaughlin's underestimation of bad debts at the end of 2011.

  • CreatedJuly 02, 2013
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