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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

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 suggest 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

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.

To evaluate: 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

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 are 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.

Company BL’s uncollectible accounts receivable is increased in recent years...

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