Beth Clark is an Accounting Manager at Specialty Products Corp. One afternoon in early January 2012, her boss, Controller Dan Greene, met with her and stated the following, "Beth, I want you to take another look at our allowance for uncollectible accounts. I think we are over-reserved and that last year's percentages for uncollectible accounts are too conservative. Here are the revised percentages I want you to use. Also, the Sales Department has reissued an invoice to Titan Industries for their $153,000 account balance. The new invoice is dated December 31, so you will need to change your aging schedule." Titan Industries was a problem customer, and Beth had heard from some employees in the Credit Department that Titan was in serious financial trouble. Titan's $153,000 account balance resulted from a sale made in early June 2011.
Beth was immediately troubled by the requests from Dan. Specialty Products was suffering from an unexpected downturn in the 4th quarter as orders from many of their customers were much lower than last year. When she expressed her apprehensions to Dan, he replied, "Don't worry about the new percentages. Those amounts aren't material. Besides, our receivables are down and our write-off's of receivables were less than last year. Also, as we discussed in our staff meeting, we need to be on the lookout for any changes we can make to boost our bottom line. The CFO is adamant about hitting the analysts' estimate for EPS this year. We all have a lot riding on that number."
The following customer balance totals were extracted from Specialty's Accounts Receivable Aging report (before the Titan Industries adjustment proposed by Dan Greene):
12/31/11 12/31/10
current accounts $ 6,200,000 $ 5,600,000
past due: 1-30 days 3,800,000 4,200,000
31-60 days 800,000 360,000
61-90 days 500,000 240,000
> 90 days 180,000 160,000
$11,480,000 $10,560,000
The following are the percentages used by Specialty for the past three years to estimate uncollectible accounts and those proposed by Dan Greene:
Historical Proposed by Dan
current accounts 3.3% 3.1%
past due: 1-30 days 7.3% 6.8%
31-60 days 10.8% 9.2%
61-90 days 22.0% 19.0%
> 90 days 56.0% 80.0%
Required:
a.) Assuming the adjustment for bad debt expense has not yet been made and that the allowance for uncollectible accounts currently has a credit balance of $94,000, what journal entry should Beth make to record the year-end adjustment?
b.) What is the pretax impact of the changes requested by Dan Greene? Do you think his changes are appropriate? Explain.
c.) As noted above, Beth felt troubled by Dan's requests. Explain Beth's ethical dilemma. What course of action should she take?