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Ethics in Action Bud Lighting Co. is a retailer of commercial and residential lighting products. Gowen Geter, the company’s chief accountant, is in the process of making year-end adjusting entries for uncollectible accounts receivable. In recent years, the company has experienced an increase in accounts that have become uncollectible. As a result, Gowen believes that the company should increase the percentage used for estimating doubtful accounts from 2% to 4% of credit sales. This change will significantly increase bad debt expense, resulting in a drop in earnings for the first time in company history. The company president, Tim Burr, is under considerable pressure to meet earnings goals. He suggests that this is “not the right time” to change the estimate. He instructs Gowen to keep the estimate at 2%. Gowen is confident that 2% is too low, but he follows Tim’s instructions. Evaluate the decision to use the lower percentage to improve earnings. Are Tim and Gowen acting in an ethical manner?

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Financial And Managerial Accounting

15th Edition
WARREN + 1 other
Publisher: Cengage Learning,
ISBN: 9781337902663

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Chapter
Section
BuyFindarrow_forward

Financial And Managerial Accounting

15th Edition
WARREN + 1 other
Publisher: Cengage Learning,
ISBN: 9781337902663
Chapter 8, Problem 1TIF
Textbook Problem
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Ethics in Action

Bud Lighting Co. is a retailer of commercial and residential lighting products. Gowen Geter, the company’s chief accountant, is in the process of making year-end adjusting entries for uncollectible accounts receivable. In recent years, the company has experienced an increase in accounts that have become uncollectible. As a result, Gowen believes that the company should increase the percentage used for estimating doubtful accounts from 2% to 4% of credit sales. This change will significantly increase bad debt expense, resulting in a drop in earnings for the first time in company history. The company president, Tim Burr, is under considerable pressure to meet earnings goals. He suggests that this is “not the right time” to change the estimate. He instructs Gowen to keep the estimate at 2%. Gowen is confident that 2% is too low, but he follows Tim’s instructions.

Evaluate the decision to use the lower percentage to improve earnings. Are Tim and Gowen acting in an ethical manner?

To determine

Assess the decision of company’s chief accountant and president to use the lower percentage to improve earnings, and describe whether they both acting in an ethical manner.

Explanation of Solution

Bad debt expense: Bad debt expense is an expense account. The amounts of loss incurred from extending credit to the customers are recorded as bad debt expense. In other words, the estimated uncollectible accounts receivable are known as bad debt expense.

Evaluate decision of company’s chief accountant and president to use the lower percentage to improve earnings, and describe whether they both acting in an ethical manner.

Uncollectible accounts receivable estimation is a challenging action, since the amount of collecting accounts receivable is uncertain. Company BL must analyze its historical record for the fair estimation of uncollectible for the portion of credit sales. Estimation of uncollectible accounts is required by GAAP (Generally Accepted Accounting Principles). GAAP requires a company to match its bad debt expenses to the revenues generated from credit sales on the same accounting year...

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Chapter 8 Solutions

Financial And Managerial Accounting
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Ch. 8 - Direct write-off method Journalize the following...Ch. 8 - Allowance method Journalize the following...Ch. 8 - Percent of sales method At the end of the current...Ch. 8 - Analysis of receivables method At the end of the...Ch. 8 - Note receivable Prefix Supply Company received a...Ch. 8 - Accounts receivable turnover and days sales in...Ch. 8 - Classifications of receivables The Boeing Company...Ch. 8 - Nature of uncollectible accounts MGM Resorts...Ch. 8 - Entries for uncollectible accounts, using direct...Ch. 8 - Entries for uncollectible receivables, using...Ch. 8 - Entries to write off accounts receivable Creative...Ch. 8 - Providing for doubtful accounts At the end of the...Ch. 8 - Number of days past due Toot Auto Supply...Ch. 8 - Aging of receivables schedule The accounts...Ch. 8 - Estimating allowance for doubtful accounts Evers...Ch. 8 - Adjustment for uncollectible accounts Using data...Ch. 8 - Estimating doubtful accounts Outlaw Bike Co. is a...Ch. 8 - Entry for uncollectible accounts Using the data in...Ch. 8 - Entries for bad debt expense under the direct...Ch. 8 - Entries for bad debt expense under the direct...Ch. 8 - Effect of doubtful accounts on net income During...Ch. 8 - Effect of doubtful accounts on net income Using...Ch. 8 - Entries for bad debt expense under the direct...Ch. 8 - Entries for bad debt expense under the direct...Ch. 8 - Determine due date and interest on notes Determine...Ch. 8 - Entries for notes receivable Valley Designs issued...Ch. 8 - Entries for notes receivable The series of five...Ch. 8 - Entries for notes receivable, including year-end...Ch. 8 - Entries for receipt and dishonor of note...Ch. 8 - Entries for receipt and dishonor of notes...Ch. 8 - Receivables on the balance sheet List any errors...Ch. 8 - Allowance method entries The following...Ch. 8 - Aging of receivables; estimating allowance for...Ch. 8 - Compare two methods of accounting for...Ch. 8 - Details of notes receivable and related entries...Ch. 8 - Notes receivable entries The following data relate...Ch. 8 - Sales and notes receivable transactions The...Ch. 8 - Allowance method entries The following...Ch. 8 - Aging of receivables; estimating allowance for...Ch. 8 - Compare two methods of accounting for...Ch. 8 - Details of notes receivable and related entries...Ch. 8 - Notes receivable entries The following data relate...Ch. 8 - Sales and notes receivable transactions The...Ch. 8 - Analyze and compare Amazon.com to Best Buy...Ch. 8 - Analyze Ralph Lauren Ralph Lauren Corporation (RL)...Ch. 8 - Analyze L Brands L Brands, Inc. (LB) sells womens...Ch. 8 - Compare Ralph Lauren and L Brands Use the data in...Ch. 8 - Analyze DISH Network DISH Network Corporation...Ch. 8 - Ethics in Action Bud Lighting Co. is a retailer of...Ch. 8 - Interest computations Bev Wynn, vice president of...Ch. 8 - Communication On January 1, Xtreme Co. began...Ch. 8 - Allowance for doubtful accounts For several years,...

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