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Allowances

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Allowances: Following is information for Garrels Company's Allowance for doubtful accounts. Examine this information and answer the following questions.
Years Ended December 31,
($ in thousands) 2011 2010 2009
Allowance for doubtful accounts Balance beginning of year ? ? $1,324 Provision charged to expense ? 502 1,349 Write offs, less recoveries 1 622 ? Balance end of year 1,453 ? 1,302
1. Solve for the unknowns in the preceding schedule. Use T-accounts.
2. Make all entries related to the Allowance for doubtful accounts account for 2009 - 2011.
3. Make all entries for bad debts for 2009 - 20111 assuming that Garrels did not accrue for estimated bad debt losses but instead recorded bad debt expense once receivables were determined to be uncollectible. (This is called the direct write-off method.)
4. Why does GAAP require the allowance method over the direct write-off method?
5. Calculate the cumulative difference in reported pre-tax income under the allowance and direct writ-off methods over the 2009 - 2011 period.
6. Assume that it is the end of 2012 and Garrels management is trying to decide on the amount of the bad debt expense for 2012. Based on an aging of accounts receivable, the accounting department feels that a $400,000 provision is appropriate. However, the company just learned that a customer with an outstanding, accounts receivable of $300,000 may have to file for bankruptcy. The decision facing Garrels management is whether to increase the initial provision of $400,000 by $300,000, by some lesser amount, or by nothing at all. What is your recommendation?
7. Continuing the scenario from #6 above is the following additional information. Assume that you are a member of the company's compensation committee. Assume further that the company's chief financial officer (CFO) is solely responsible for deciding the amount of bad debt expense to record and that the CFO has a cash bonus plan that is a function of reported earnings before income taxes. Specifically, assume that the CFO receives an annual cash bonus of zero if earnings before income taxes are below $17 million and 10.0% of the amount by which earnings before income taxes exceeds $17 million and up to a maximum bonus of $1 million (that is, when net income reaches $27 million, no further bonus is earned). What adjustment to the initial $400,000 bad debt provision might the CFO make in each of the following scenarios? Assume that the following earnings before income taxes include the initial $400,000 provision for bad debts.
a. $11 million
b. $18.2 million
c. $38.25 million
d. $27.15 million
8. What other scenarios can you identify in which managers might use the provision for bad debts to accomplish some contract-related strategy?
9. Identify other items in the financial statements (besides the bad debt provision) that managers have the ability to "manage."

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See Also This Related BrainMass Solution

Journalize and post to the allowance account

Presented here is an aging schedule for Zimmerman Company.
Please see attachment.

Customer Total Not Yet Due Number of Days Past Due
1â?"30 31â?"60 61â?"90 Over 90
Aaron $22,000 $12,000 $10,000
Barry 40,000 40,000
Cara 60,000 16,000 6,000 38,000
Donald 28,000 28,000
Others 126,000 96,000 16,000 14,000
Total $276,000 $152,000 $34,000 $24,000 $38,000 $28,000
Estimated percentage uncollectible 4% 9% 13% 25% 50%

Total estimated bad debts $35,760 $6,080 $3,060 $3,120 $9,500 $14,000

At December 31, 2009, the unadjusted balance in Allowance for Doubtful Accounts is a credit of $11,700

Instructions:
(a) Journalize and post the adjusting entry for bad debts at December 31, 2009. (Use T accounts.)

Dec 31 Account title Amount
Account title Amount

Bad Debts Expense Allowance for Doubtful Accounts

(b) Journalize and post to the allowance account these 2010 events and transactions:
1. March 1, a $500 customer balance originating in 2009 is judged uncollectible.

Mar 31 Account title Amount
Account title Amount

2. May 31, a check for $500 is received from the customer whose account was written off as uncollectible on
March 31.

May 31 Account title Amount
Account title Amount

May 31 Account title Amount
Account title Amount

(c) Journalize the adjusting entry for bad debts at December 31, 2010, assuming that the unadjusted balance in Allowance
for Doubtful Accounts is a debit of $800 and the aging schedule indicates that total estimated bad debts will be
$33,800

Dec 31 Account title Amount
Account title Amount

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