In: Accounting
Change in Estimate versus Error Correction- LandCo is a lawn service company 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 LandCo’s corporate customers is an eldercare facility whose grounds the company has maintained for many years. The customer has not paid for the last three months of service (from October – December 2019); nevertheless, to maintain a positive relationship, LandCo continued to provide mowing and weed control services to the eldercare facility during that time. LandCo ceased providing services in January 2020 and found out in that same month that the eldercare facility filed for bankruptcy in September. LandCo now believes that collection of the missed payments is extremely unlikely.
LandCo has already issued financial statements to lenders (for the period ending 12/31/2019) which reflected revenue and a corresponding account receivable related to this customer of $10,000 per month for services provided. Those financial statements also reflected the company’s standard allowance (reserve) amount on receivables, of 4% of sales. In total, LandCo’s average monthly sales amount to $500,000.
Required:
1- Evaluate whether receipt of this information indicates you have a change in estimate or the customer's bankruptcy results in this event being considered an error in previously issued financial statements. Describe the accounting treatment required by the Codification for each alternatives with draft journal entries.
2- Research US accounting standards to determine the proper treatment for the service receivable/customer bankruptcy on LandCo’s financial statements, assuming it is headquartered in the United States.
3- Research international accounting standards to determine the proper treatment for LandCo’s transactions, assuming it is headquartered in France.
1) | According to the case given statement "change in estimate or the customer's bankruptcy results in the event being considered an error in previously issued finacial statements" is not correct. | |||||
The bankruptcy in not expected to take place on frequent or regular basis and is not in normal course of business of Land co.Thus,the same qualifiesto be an extrordinary item.Also,The bankruptcy took place in the month of sep 2019 but discoured in Jan 2020.This suggest that although the loss related to previous year is not shown and profit was overstated by such amount i.e $ 30000.This is prior period item so disclosures for the same should be given in the current financial year. | ||||||
adjustment Entry | ||||||
Prior period loss a/c Dr | $30000 | |||||
To Accounts Recivable a/c Cr | $ 30000 | |||||
Profit & Loss a/c Dr | $ 30000 | |||||
To Prior period Loss a/c Cr | $ 30000 | |||||
2 ) | As per US Accounting statndards disclose for reporting changes and error correction.it includes all the information necessary for user of the company's financial information to understand all aspects and required disclosure information concerning all changes and error correction reported in the company's financial statements for the period. | |||||
3) | As per international accounting standard prior period errors to be rectified retrospectively and not be shown under separate heads.The financial statements of previous period are to be adjusted to show the effect of prior periods. | |||||