Question

AGUAMAINT, INC. REQUIREMENT 2

You returned to Aguamaint about mid-afternoon on Wednesday, January 7. Jerry Loos had prepared written responses to all of your questions. After getting clarification on a couple of points, you are ready to get to work to complete the necessary adjusting and correcting entries.

REQUIRED:

Use the information provided below to create all adjusting and correcting journal entries needed to assure that Aguamaint’s financial statements will be in accordance with U.S. GAAP. Documentation for each journal entry should include a detailed explanation and all necessary calculations.

- develop 1 page, double-spaced paper for each issue, must include:

1. State the identified accounting issue
2. Identify the accounting rule(s) that pertain(s) to the issue(s)
3. Explain in your own words the accounting rule(s) and treatment of the issue

the issue: 1) Are all receivables collectible? Do you require an allowance for doubtful accounts?

Collection of the receivables will be no problem. We know all the customers with whom we have a contract and we have reviewed each of the accounts at year-end for any potential problems. Everyone has paid on time thus far.

Answer 1

Are all receivables collectible -

The sale method is the key here. For example some of the sale can be "cash" based, meaning unless the customer pays the cash the goods will not be delivered.  Hence the credit loss is not possible. However if the sale is credit (which is very regular) the payment depends on the credit quality of the customer. Imagine if the cutomer went into bankruptcy the seller will never receive the payment. This is the reason business creates a provision account each year to avoid such losses.

Hence all receivables may not be collectible - particularly credit sales. How do we evaluate the need for provision of losses ? see below steps

as per ASU 310 - The next step is evaluating the profiles of customers. Further there is need to evaluate "specific charectristics" which may prevent the borrower from repaying the amount.

If the business determined that there were no such factors as mentioned above - then as per GAAP there is no need to create allowance. If the answer to above is yes - then the allowance is to be created.

Since the question clearly mentioned that -

1) the business did evaluated all the accounts and contracts

2) Collection was not a problem

As per GAAP there is no need to clreate loss allowance in such a case.