Question

Brief Case Assignment #2

Requirement:

Read the background info below. Assume the role of a CPA who has been asked by your client (the controller of Clarkson Outdoors, Inc.) to provide some accounting guidance for shipping and “handling” charges for internet sales.

Use your available research resources (GAAP codification, textbook) to research the accounting questions asked by the controller.

Prepare a brief (no more than one - page) memo to the controller that addresses, in your own words, the alternatives the controller must considers when making the decision to add a shipping and/or handling charge to customers that purchase online. Cite the appropriate accounting standards to support any alternatives you present to the client. Conclude with your recommendation to the controller.

Grade:

This is a basic writing assignment that should take no more than one hour to complete. You will receive full points based on (1) providing a recommendation based on sound accounting practices, (2) clarity and organization and (3) grammar and spelling.

Case Background:

Your client, Clarkson Outdoors, Inc. is a wholesale merchandising business that sells outdoor furniture. The company’s average monthly sales revenue is $250,000 representing approximately 5,000 inventory items sold. Due to rising fuel costs and the gen eral rising costs of processing orders, including returns, the controller is considering adding a charge for shipping and or handling costs on products sold through its website. What is the authoritative guidance for reporting these costs? The controller has one specific question about whether the company must pass through to the customer the exact charge the company would incur or whether it can assess charges based on some reasonable rate or schedule.

Answer 1

Ans 1. - As per the Accounting Standard and Framework for the Preparation and Presentation of Financial Statements it is advisable to account for the collectibles in an Aging Report Manner. Aging Report includes dues remaining for 0-30 days 31-60 days 61-90 days and 90 days and more. Using the above method or bifarcation a reminder call should be set up in order to attain whether the collectible is still receivable or not. Once the amount is confirmed as Not Collectible it should be removed from the receivable or collectibles account and be expensed out as Bad Debts. By this method we get to focus on actual collectibles at the end of year reporting period.

If theres an allowance created for the Bad Debts expenses in the books then such amounts should be accounted in that first as during the process of the creation of the allowances we have already charged the Profit and Loss Account.

However, Gross Sales cannot be reduced as this not a sales return, It will continue to be showed as sales and the corresponding effect should be given in the non operating cost for the company.

Ans. 2 - Expenditures incurred in lieu of the collectibes should be expensed out in the Profit and Loss Account separately as a Non Operating Cost to the company. Account Head specifically can be used is Legal Expenses as the company has to bare the legal charges to file the suit against the debtor and other connected charges. Also, the nature of expenses and the account match. Hence, it should be expensed off in the Legal Expenses Account.

As for the Bad Debts Expenses - This account includes the amount written off as non collectible. Hence, the expenses incurred to collect them should be accounted separately and not in the same account as the written off account as the nature of expenses are different.

As for the Allowance for Doubtful Debts - In this account there is a provision created for the possibility of the collectible to become bad debt. Hence the nature of account and the expenses are completely different from the once incurred to collect them.

As for the Administrative Expenses - In this account expenses in relation to the administrative work of the organisaion is collected. It is part of the Cost of Goods Sold. Hence, this expenses cannot be included in the COGS as for it vunerable nature.

Ans.3 - If the bad debts is recovered after been written off in the same year i.e. recovered in the year it is written off, we need to only reverse the adjustment and add it back to profits of the company.

However, If the bad debts are recovered in the subsequent year then we need to add it to the Other Income of the company as the company would need to pay taxes on the same since it was removed from the profit of the company in the previous year.

In case, only allowance is made for the debt we need to reverse the allowance and write it back as profits of the company.