You are the accountant for London Imports and Exports. The company imports and exports food and candy items throughout the world. The company is finalizing its 3^rd quarter financial results. All adjustments have been made for the 3^rd quarter except the adjustment for Bad Debts Expense. The preliminary 3^rd quarter results along with the 1^st and 2^nd quarter results are shown below.

London Imports and Exports Quarterly Income Statements (amounts in thousands of U.S. dollars)
	Q3 (preliminary)	Q2 (as reported)	Q1 (as reported)
Net Sales	$135,800	$135,460	$130,100
Cost of Goods Sold	(58,400)	(58,250)	(55,990)
Gross Profit	$77,400	$77,210	$74,110
Selling, General, & Admin. Expenses	(56,560)	(53,975)	(53,690)
Bad Debts Expense	--------	(6,050)	(4,200)
Income Before Income Tax	20,840	17,185	16,220
Income Tax Expense	(5,620)	(5,155)	(5,020)
Net Income	$15,220	$12,030	$11,200

The CFO asked you to look at the Allowance for Doubtful Accounts and use the Aged Accounts Receivable to calculate the adjustment needed for bad debts expense for the 3^rd quarter. The CFO stated that he knows the customers are slower at paying this quarter but he wants the Allowance for Doubtful Accounts to not be increased; in fact he’s encouraging you to decrease it so it has an adjusted balance of $8,000. He wants you to play around with the estimated bad debt loss rates to get the number he wants for the adjusted balance of the Allowance account. You are confused, so you decide to analyze the Allowance for Doubtful Accounts, and you came up with the following summary of the T account below:

Allowance for Doubtful Accounts
	7900 Jan. 1 Balance Forward
Q1 Write Offs 4110	4200 Q1 Bad Debts Estimate
	7990 March 31 Adjusted
Q2 Write Offs 4120	6050 Q2 Bad Debts Estimate
	9920 June 30 Adjusted
Q3 Write Offs 4030	--------
	5890 September 30 Unadjusted

AGING OF ACCOUNTS RECEIVABLE SCHEDULE:

Number of Days Unpaid	0-30 Days	31-60 Days	Over 60 Days	Total
Total Accounts Receivable	$10,000	$35,000	$78,000	$123,000
Estimated Uncollectible %	1%	8%	12%

Answer the following questions:

1. 1. What is the problem with the Controller asking you to "play around with the estimated bad debt loss until you get it to work"?
2. 2. If you were to record the bad debts expense based on what you learned in accounting, what amount would you record and how did you calculate this?
3. 3. If you were to record the bad debts expense based on what the controller wants, what amount would you record and how did you calculate this?
4. 4. Is there any evidence of unethical behavior in this case? Thoroughly explain your answer. Refer to specific GAAP rule/s that should be followed. Be sure to mention how net income would be affected based on your answers to #2 and #3 and how this would affect stakeholders. State what you believe is the ethical course of action.

Answer rating: 100% (QA)

1 The problem with the Controllers request to manipulate the estimated bad debt loss rate is that it goes against the principles of prudence and faith... View the full answer