Question

Wanda B. Rich is the CEO of Outlet Flooring, a discount provider of carpet, tile, wood, and laminate flooring. At the end of the year, the company’s accountant provides Wanda with the following information, before any adjustment.
Accounts receivable ............. $ 11,000,000
Estimated percentage uncollectible ....... 4%
Allowance for uncollectible accounts ...... $ 110,000 (credit)
Operating income ............. $ 2,900,000
Wanda has significant stock ownership in the company and, therefore, would like to keep the stock price high. Analysts on Wall Street expect the company to have operating income of $ 2,200,000. The fact that actual operating income is well above this amount will make investors happy and help maintain a high stock price. Meeting analysts’ expectations will also help Wanda keep her job.

Required:
1. Record the adjustment for uncollectible accounts using the accountant’s estimate of 4% of accounts receivable.
2. After the adjustment is recorded in Requirement 1, what is the revised amount of operating income? Will Outlet Flooring still meet analysts’ expectations?
3. Wanda instructs the accountant to instead record $ 700,000 as bad debt expense so that operating income will exactly meet analysts’ expectations. By how much would total assets and operating income be misstated if the accountant records this amount?
4. Why would Wanda be motivated to manage operating income in this way?



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  • CreatedJuly 15, 2014
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