Wildcat Sporting Goods (WSG) sells athletic shoes and trendy sports apparel to a variety of sporting goods stores in the Northeast and, in 2011, WSG also began direct Internet sales to consumers. WSG€™s common shares are publicly traded and WSG has a December 31 year- end. WSG has historically received an unqualified opinion from its audit firm. Selected financial data is provided below:

* 2012 pretax income is an estimate Assume that you are the controller. At year- end, the CFO has asked you to determine the amount of the allowance for doubtful accounts for accounts receivable. The CFO received an accounts receivable allowance analysis ( see below) from the new credit manager that estimated an allowance of $ 16.3 million, which is up significantly from the prior year. The CFO has asked you to scrutinize the attached analysis, as she expects that the allowance balance should not exceed last year€™s allowance, given that sales are down approximately 12% from the prior year. The aging in the attached analysis indicates the days outstanding since the original sale ( e. g., a 30- day- old receivable would indicate the sale occurred 30 days ago and not that the receivable is 30 days past due). The CFO also mentioned that the company€™s debt covenants require, among other things, pretax earnings of at least $ 10.0 million. You had discussions with various personnel this month and have gained the following additional insights. An economic recession caused WSG€™s sales to decline in 2012. In an effort to improve its sales, WSG extended more generous credit terms to its customers. Beginning in the fourth quarter of 2012, customers were granted an additional 30 days to pay off their debts, so the credit window has been extended from 30 days to 60 days. Days sales outstanding have increased slightly from approximately 44 days in 2011 to 57 days in 2012. The Internet sales have little credit risk, because the credit card company must approve the charge before any shipments are made. These sales are settled in less than 30 days. The December 31 receivable balances on Internet sales in the 0€“ 30 aging were $ 3.0 million and $ 6.0 million in 2011 and 2012, respectively. With the exception of a few large customers, the receivables are due from a large group of small, homogenous customers. The estimated allowance for doubtful accounts has been based on general expectations and historical losses for most accounts receivable. The average credit score of customers in 2012 is essentially unchanged from prior years. For those customers with more than a $ 500,000 balance, a specific analysis of accounts receivable is performed. Estimates of the allowance for doubtful accounts were a bit less than actual losses in 2009 and 2010, and a bit higher than actual losses in 2011. See the attached allow-ance analysis. Approximately 22.4% of the accounts receivable balance at December 31, 2012, is over 91 days old.
Based on a discussion with the Senior VP of Sales, the following is a summary of the major customers with balances over $ 500,000.
€¢ Sports World€™s accounts receivable from 2011 remains outstanding at December 31, 2012. This customer agreed to pay off this balance by paying $ 200,000 per month starting in August 2012. The first three monthly payments were made and the balance at December 31, 2012, is $ 3.0 million. The payments due in November 2012, December 2012, and January 2013 have not been received. The phone calls of the credit manager have not been returned. At December 31, 2011, the receivable was 31 to 60 days old and this receivable was reserved at the same level as other receivables in this aging category.
€¢ A new customer in 2011, Slow Pay, has always paid its bills after it sells the product. At December 31, 2012, Slow Pay has an outstanding balance of $ 10.0 million; $ 3.0 million is over 120 days old, $ 2.0 million is 91 to 120 days old, and $ 5.0 million is 31 to 60 days old. Payments continue to be received and all amounts over 120 days old at December 31, 2012, were collected in January 2013. At December 31, 2011, Slow Pay had an outstanding balance of $ 4.0 million; $ 500,000 was over 120 days old, $ 500,000 was 91 to 120 days old, $ 2.0 million was 31 to 60 days old, and $ 1.0 million was 0 to 30 days old. No reserve was provided for this customer€™s receivables in 2011 and all amounts were collected in 2012.
€¢ New Wave has an outstanding balance of $ 5.0 million at December 31, 2012; $ 1.0 million is over 120 days old, $ 1.5 million is 91 to120 days old, and the $ 2.5 million balance is 61 to 90 days old. This company was a new start- up in 2012 and, therefore, WSG does not have any credit history for New Wave. WSG has put a hold on additional shipments to New Wave until payments are received. The credit manager said there are rumors that the company might go into bankruptcy. Separately, in December 2012, the Senior VP of Sales spoke to the wealthy owner of NewWave, who personally assured him that New Wave intended to pay its outstanding balance in the coming weeks. In January 2013, the Senior VP of Sales obtained a written personal guarantee of the amounts owed from the owner of NewWave. The personal financial statements of the owner confirmed he has a net worth in excess of $ 20.0 million.
€¢ High Flyer has an outstanding balance of $ 1.0 million at December 31, 2012: $ 500,000 is 61 to 90 days old and the balance is 31 to 60 days old. The owners of High Flyer have just put another company they own in a troubled industry into bankruptcy.
€¢ None of the remaining customer balances is greater than $ 500,000 at December 31, 2012.
€¢ At December 31, 2011, the only two customers with balances over $ 500,000 were Sports World and Slow Pay. Prior to 2011, the company did not have any customers whose balance exceeded $ 500,000 at year- end.
The new credit manager€™s compensation is, in part, tied to his ability to reduce the write-off rate for sales starting in 2013. Thus, the credit manager has an incentive to justify more significant write- offs in the current year than may be warranted.
Required
€¢ For December 31, 2012, perform an assessment of the allowance for doubtful accounts receivable.
€¢ Document your judgment in a draft memorandum format that you will provide to the CFO (not to exceed three pages). Use the Codification for support.

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2009 2010 2011 2012 Sales $300,000,000 360,000,000 $420,000,000 $370,000.000 100% 0% 80% 20% Credit sales 100% 90% 10% 0% Internet sales Accounts receivable Allowance for doubtful accounts Allowancelaccounts receivable Total assets Pretax inoome S 42,000,000 S 4,150,000 53,000,000 S48,000,000 67000,000 5,000,000 4,300,000 16,300,000 9.88% 9.43% 8.96% 24.33% $200,000,000 $250,000,000 $300,000,000 $320,000,000 S 10,000,000 12,000,000 15,000,000 4,000,000 Accounts receivable allowance analysis 0 to 30 days $30,000.000 71.43% 1,200,000 4.00% 31 to 60 days 4,000,000 9.52% 61 to 90 days 2,500,000 5.96% $550.000 22.00% 91 to 120 days $4000.000 9.52% Over 120 days $1,500.000 3.57% 1.200,000 80.00% Total $42.000,000 2009 accounts receivable aging balance Aging peroentage Estima ted unoollectble Estima ted unoollectible peroantage Actual uncollectible write-off Actual write-off peroentage 2010 accounts receivable aging balance ging peroentage Estimated unoollectible Estimated unoollectibe peroentage Actual uncolectible write-off Actual write-off peroentage 2011 accounts receivable aging balance Aging percentage Estimated uncollectible Estimated uncollectible percentage Actual uncollectible write-off Actual write-off percentage 2012 acco unts receivable aging balance Aging percentage Estimated uncollectible Estimated uncollectible percentaga $4.150,000 10.00% 20.00% 4200,000 10.00% $53,000,000 $35.000.000 66.04 % S 700,000 2.00% $10,000,000 18.87% $ 800.000 800% 3,000,000 5.66% $1000,000 189% 400.000 40.00% 4,000,000 $ 2,200,000 5.000,000 30.00% 5,100,000 9.62% $48.000,000 $30,000000 62.50% $300,000 1.00% $8.000,000 16.67% S 600,000 750% 4,000.000 8.33% $ 800,000 20.00% 4,000.000 833% 1,800,000 45.00% $2,000.000 4,300,000 8。96% 4200,000 875% $67000,000 40.00% $15,000,000 22.39% $600,000 $27000,000 40.30% 2,700,000 10.00% $10,000,000 14.93% 3,000.000 30, 0096 $5,000,000 746% $2.000,000 40.00% $10,000,000 14 93% 8,000,000 80.00% $16300,000 24.33%