Question

You are the owner of a lawn service company (LawnCo) which provides grounds and maintenance services to a range of corporate customers. Customers are expected to pay on the first of each month, in advance of receiving services. One of your corporate customers is an eldercare facility whose grounds you have maintained for many years. The customer has not paid for the last three months of services (from Oct.–Dec. 2020); nevertheless, to maintain a positive relationship, your company continued to provide mowing and weed control services to the eldercare facility during that time. Your company ceased providing services in January 2021 and found out in that same month that the eldercare facility filed for bankruptcy in September. Your company now believes that collection of the missed payments is extremely unlikely.  Your company has already issued financial statements to lenders (for the period ending 12/31/20) which reflected revenue and a corresponding account receivable related to this customer of $10,000 per month for services provided to this customer. Those financial statements also reflected the company’s standard allowance (reserve) amount on receivables, of 4% of sales. In total, your company’s average monthly sales amount to $500,000.

Required:

Your paper should be structured in the format of an issues memo.

1. Evaluate whether receipt of this information indicates you have a change in accounting estimate or whether the customer’s bankruptcy should result in this event being considered an error in previously issued financial statements.

2. Next, describe the accounting treatment (as required by the Codification) for each alternative, then support your explanations with draft journal entries.

3. Finally, briefly state which treatment appears to be more appropriate given the circumstances. If you must make any assumptions in reaching this conclusion, state these.

Answer 1

solution:

1.After accepting the data that the eldercare office has gone bankrupt, we should treat the three months due as an awful obligation. Not as a blunder in beforehand issued fiscal reports. This is so on the grounds that because of default of the contribution the eldercare office turns into an account holder and on the off chance that an indebted person does not pay his due and is announced wiped out, at that point the borrowers due turns into an awful obligation.

2. First alternative:-

now the three months due should be treated as bad debt and it's journal entry will be-.

particulars	debit	credit
Bad debt A/c	30000
To Sundry DebtorsA/c.		30000

Second alternate-

If it is treated as an estimate in previously issued financial statements then the journal will be

particulars	debit	credit
Sales A/c	30000
To Sundry DebtorsA/c.		30000

particulars	debit	credit
Sundry Debtors A/c (4℅ of 30000).	1200
To Reserve for doubtful debtsA/c.		1200

3.

Since, the administrations has just been rendered to the eldercare office we need to regard it as an awful obligation in light of the fact that the office has been given for $10000 for three months, so the administrations rendered can't be amended. Along these lines, it is better we treat it as an awful obligation as opposed to a mistake in the bookkeeping gauge.