The following is an excerpt from a conversation between Joy Pauly, the president and owner of Mullion Wholesale Co., and Trevor Conkle, Mullion controller. The conversation took place on January 3, 2008, shortly after Trevor began preparing the financial statements for the year ending December 31, 2007.
Trevor: Joy, I've completed my analysis for the collectability of our accounts receivable. My staff and I estimate that the allowance for doubtful accounts should be somewhere between USD 60,000 and USD 90,000. Right now, the balance of the allowance account is USD 18,000.
Joy: Oh, no! We are already below the estimated earnings projection I gave the bank last year. We used that as a basis for obtaining a USD 300,000 loan. They're going to be upset! Is there any way we can increase the allowance without the adjustment increasing expenses?