Question

Problem Set A
Copeland Company had the following account balances at December 31, 2016, before recording bad debt expense for the year:
	Unadjusted Trial Balance
	Accounts receivable			$1,400,000
	Allowance for uncollectible accounts (credit balance)			22,000
	Credit sales for 2016			1,950,000
	Ending 12/31/2015
	Balance in Accounts receivable on 1/1/2016			$1,200,000
	Balance in Allowance for uncollectible accounts (credit balance) on 1/1/2016			24,000
Copeland is considering the following approaches for estimating bad debts for 2016:
	Option A: Based on 3% of credit sales
	Option B: Based on an aging of year-end accounts receivable
	Days	Amount Outstanding	Estimated % Uncollectible
	0-30	$800,000	3%
	31-60	300,000	6%
	61-120	200,000	9%
	Over 120	100,000	24%
		$1,400,000
REQUIRED:
1	Do the adjusting journal entry under Option A and Option B.
2	What amounts would be reported on the 12/31/2016 financial statements related to Accounts Receivable under Option A and Option B?
	Make sure to include the effect on the Income Statement, Balance Sheet and Statement of Cash Flows (under the Direct AND Indirect Method), and the Statement of Stockholders' Equity.
3	What is the difference in accounts receivable turnover and the credit risk ratio under Option A v. Option B?
4	Which option may management prefer? Which option may shareholders or regulators prefer? Please discuss
Option A - Adjusting JE
Option B - Adjusting JE
Option A - Financial Statement Effects
	Income Statement
	Balance Sheet
	Statement of Cash Flows - Indirect:
	Statement of Cash Flows - Direct (Cash collected from customers):
	Statement of Stockholder's Equity
Option B - Financial Statement Effects
	Income Statement
	Balance Sheet
	Statement of Cash Flows - Indirect:
	Statement of Cash Flows - Direct (Cash collected from customers):
	Statement of Stockholder's Equity
Option A - AR Ratios
	Turnover
	CR Ratio
Option B - AR Ratios
	Turnover
	CR Ratio

Answer 1

	Accounts Receivable		1400000
	Allowance for uncollectible accounts (credit balance)		22000
	Credit Sales for 2016		1950000
	Ending 12/31/2015
	Balance in accounts receivables on 01/01/2016		1200000
	Balance in allowance for uncollectible accounts on 01/01/2016		24000
	Option A : Based on 3% of credit sales
	3%*1950000	58500
	Option B: based on an aging of year-end accounts receivable
Days	Amount outstanding	Estimated % uncollectible
0-30	$800,000	3%	$24,000
31-60	300000	6%	$18,000
61-120	200000	9%	$18,000
over 120	100000	24%	$24,000
	$1,400,000		$84,000
	If Option A is selected
	Accounts Receivable	1400000
	Less : Allowance for uncollectible accounts	-22000
		-58500
	Accounts Receivable	1319500
	If Option B is selected
	Accounts Receivable	1400000
	Less : Allowance for uncollectible accounts	-22000
		84000
	Accounts Receivable	1462000
	Option A - Financial Statement Effects
	Income Statement	Debited in account statement by 58500
	Balance Sheet	Reduction from accounts receivable
	Statement of Cash Flows - Indirect:	The net increase or decrease in receivables is added or subtracted from operating income
	Statement of Cash Flows - Direct (Cash collected from customers):	Cash collect would be reduced since increase in bad debt expense
	Statement of Stockholder's Equity	Decrease in retained earnings will reduce stockholder's Equity
	Option B
	Income Statement	Debited in account statement by 58500
	Balance Sheet	Reduction from accounts receivable
	Statement of Cash Flows - Indirect:	The net increase or decrease in receivables is added or subtracted from operating income
	Statement of Cash Flows - Direct (Cash collected from customers):	Cash collect would be reduced since increase in bad debt expense
	Statement of Stockholder's Equity	Decrease in retained earnings will reduce stockholder's Equity
Option A	Inventory Turnover
	1950000/1319500	1.477832512
	Credit Risk(58500+22000)	80500
		1400000
		5.75%
Option B	Inventory Turnover
	1950000/1462000	1.33378933
	Credit Risk(84000+22000)	106000
		1400000
	Credit Risk	7.57%