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Below are pre-adjusted balances for Snorlax Corp. as of 12-31-19: Accounts Receivable: $100,000 (debit) Allowance for...

  1. Below are pre-adjusted balances for Snorlax Corp. as of 12-31-19:
    1. Accounts Receivable: $100,000 (debit)
    2. Allowance for Bad Debts: $12,000 (debit)

On 12-31-19, Snorlax applies the Percentage of Receivables method and estimates that 15% of their receivables will be uncollectible. 2019 write-offs (recorded prior to 12-31-19) totaled $20,000.  

  1. What will Snorlax report as “Accounts Receivable, net” on their 2019 balance sheet? To receive any credit, you must show your work.
  1. What will Snorlax report as “Bad Debt Expense” on their 2019 income statement? To receive any credit, you must show your work.
  1. Suppose that Snorlax’s average collection period increased from 45 days in 2018 to 60 days in 2019.

  1. Provide an example of how Snorlax’s credit policies could contribute to this increase.

  1. Provide an example of how earnings manipulation could contribute to this increase.

Solutions

Expert Solution

a. What will Snorlax report as “Accounts Receivable, net” on their 2019 balance sheet?

Pre adjusted Accounts Receivable balance = $100,000

Less: 15% of accounts receivable estimated as uncolloctible (ie. allowance for bad debts) = $100,000 x 15% = $15,000

Balance of Accounts Receivable after adjustment of bad debt allowance on balance sheet= $85,000

b.What will Snorlax report as “Bad Debt Expense” on their 2019 income statement?

Total bad debt write offs till 31-12-2019 = $20,000

Add: accounts receivable estimated as uncolloctible (Bad debt Expense on 31-12-2019) = $15,000

Bad debt expense for the year 2019 in income statement = $35,000

c.Provide an example of how Snorlax’s credit policies could contribute to this increase.

Average collection period has increased from 45 to 60 days. This means that it is taking longer to collect receipts from credit sales. This could be due to a loose credit policy. For instance the credit policy might not have clearly divided the responsibility of collection to any personnel. Or it could be that the credit policy is silent on the follow up procedure of uncollected receipts.

d.Provide an example of how earnings manipulation could contribute to this increase.

Average collection period has increased from 45 to 60 days. This means that it is taking longer to collect receipts from credit sales. This could be due to manipulation of earnings. As you might already know Average collection period is calculated by deviding average accounts receivable by annual sales and no. of days in a year. So earlier when earnings were not manipulated accounts receivable would be lesser amount, where as after manipulation the accounts receivable would show a higher figure(which is fictitious as its manipulated). So when the numerator of the equation increases the average collection period ought to increase.

ekkarill92 answered 1 year ago
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