Question

                              2-1: Issue and Rule Research - BAM Year 1

Action Items

-----develop a 1 page, double-spaced paper for each issue(s) you are researching. Each paper must:

• State the identified accounting issue
• Identify the accounting rule(s) that pertain(s) to the issue(s)

• Explain in your own words the accounting rule(s) and treatment of the issue

                                                   AGUAMAINT, INC.

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.

The issues:

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

Issue No.1 : Are all Receivables collectible

Issue No 2 : Requirement of an allowance for doubtful Accounts

A Company evaluates the collectability of Accounts receivable based on several factors. During the year, collection of outstanding receivables notably detoriated compared to previous years causing the company to recognise a material increase in its allowance for credit losses. As a result, the company concludes disclosure of the change in the allowance is required. As an example the company could disclose the following in the notes to its financial statements:

In the year ended 20x6, due to detoriation in collection of receivables, the company changed its estimates of allowance for credit losses related to its customers, primarily based on historical experience of write off outstanding accounts receivable. The result of this change in estimate resulted in an increase compared to the year ended 20x5 to the allowance for credit losses by approximately( some amount) in the year ended 20x6.

There are Two methods to calculate allowance of doubtful accounts

1. Income statement approach: in this method allowance for doubtful accounts is the specific percentage on sales

2. Balance sheet approach: in this method allowance for doubtful accounts is the percentage on accounts receivable.

Estimates are the responsibility of management to improve the accuracy of the presentation of the financial statements. When a receivable exists there is a degree of uncertainty about the collectability of that receivable and per U.S. GAAP that uncertainty should be estimated and recorded. All methods require management to determine a percentage estimate based on their understanding of the industry, current economic factors, and the customers’ payment history and credit worthiness.

Here in the given case the company has no problem with receivables by the end of the year company can collect all its receibles in that case if the company followed Balace sheet approach then there is nocase of allowance because all receivables collected by the end of the year, if the company following In come statement approach then company has to create certain amount as doubtful based sales during the period.

If Allowance for doubtful asset is created then the Journal entry will be,

Bad debt expense A/c Dr $

TO Allowance for Doubtful Accounts $