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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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It is February 16, 2020, and you are auditing Davenport Corporation's financial statements for 2019 (which will be issued in March 2020). You read in the newspaper that Travis Corporation, a major customer of Davenport, is in financial difficulty. Included in Davenport’s accounts receivable is $50,000 (a material amount) owed to it by Travis. You approach Jim Davenport, president, with this information and suggest that a reduction of accounts receivable and recognition of a loss for 2019 might be appropriate. Jim replies, “Why should we make an adjustment? Ted Travis, the president of Travis Corporation, is a friend of mine; he will find a way to pay us, one way or another. Furthermore, this occurred in 2020, so let’s wait and see what happens; we can always make an adjustment later this year. Our 2019 income and year-end working capital are not that high; our creditors and shareholders wouldn’t stand for lower amounts than they already are.”

Required:

From financial reporting and ethical perspectives, prepare a response to Jim Davenport regarding this issue.

To determine

Prepare a report to Person J with regard to financial reporting and ethical perspectives.

Explanation

From the perspective of financial reporting, this is considered as a subsequent event. An adjustment is made to the subsequent event if it gives additional evidence regarding conditions that were presented on the balance sheet date and considerably affects an estimate used while preparing the financial statements. If the subsequent event happened after the balance sheet date and if the subsequent event does not relate to conditions existing on the balance sheet date, then no adjustment is made to the balance sheet reported. Rather, the information is disclosed in a note, in an explanatory paragraph in the audit report or pro forma statements grounded on the materiality.

Therefore, if there is a sufficient evidence that accounts receivable of $50,000 (Corporation T) cannot be collected and if the all of those uncollectible existed at the end of 2019, then the recognition of a loss and a write-down of the accounts receivable is made in 2019’s financial statements of Corporation D and if there existed a sufficient evidence of the uncollectible but it did not occur until 2020, then a note disclosure is suitable.

From an ethical perspective, there are some major stakeholders, including the creditors and shareholders of Corporation D, the creditors and shareholders of Corporation T, Person J, and Person T. Corporation D’s income and working capital is decreased, if the loss and write-down are predictable that may have an adverse effect on Corporation D’s capacity to provide a return to shareholders and pay creditors...

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