The following balances appeared in the accounting records of Hunt Ltd for the year ended 31...
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The following balances appeared in the accounting records of Hunt Ltd for the year ended 31 December 2020: 2020 2019 Accounts receivable Allowance for doubtful debts 2 900 000 87.000 2 400 000 72 000 Additional information: The company has maintained its allowance for doubtful debts at 3% of accounts receivable over the past few years, based on the estimated recoverability of outstanding debts. The effect of COVID-19 continued to impact operations throughout the 2020 financial year, with a noticeable slowing down in receivables turnover. The Sales Manager noted that several customers had contacted Hunt Ltd to discuss extended repayment terms. The Financial Accountant has proposed that the allowance for doubtful debts be increased to 8% of accounts receivable to more accurately reflect its net realisable value. Required: c) Drawing on Positive Accounting Theory explain whether management would prefer to increase the allowance to 8% or to maintain the allowance at 3%. In your answer you should indicate management's likely preference from both an efficiency perspective and an opportunistic perspective. (4 marks) The following balances appeared in the accounting records of Hunt Ltd for the year ended 31 December 2020: 2020 2019 Accounts receivable Allowance for doubtful debts 2 900 000 87.000 2 400 000 72 000 Additional information: The company has maintained its allowance for doubtful debts at 3% of accounts receivable over the past few years, based on the estimated recoverability of outstanding debts. The effect of COVID-19 continued to impact operations throughout the 2020 financial year, with a noticeable slowing down in receivables turnover. The Sales Manager noted that several customers had contacted Hunt Ltd to discuss extended repayment terms. The Financial Accountant has proposed that the allowance for doubtful debts be increased to 8% of accounts receivable to more accurately reflect its net realisable value. Required: c) Drawing on Positive Accounting Theory explain whether management would prefer to increase the allowance to 8% or to maintain the allowance at 3%. In your answer you should indicate management's likely preference from both an efficiency perspective and an opportunistic perspective. (4 marks)
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Positive Accounting Theory PAT suggests that managers make decisions based on their selfinterest and seek to maximize their personal benefits In the c... View the full answer
Related Book For
Auditing Assurance Services and Ethics in Australia an Integrated Approach
ISBN: 978-1442539365
9th edition
Authors: Alvin A Arens, Peter J. Best, Greg Shailer, Brenton Fiedler
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