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Adjusting Entries and Communication

Alexander, Apanyin

MBA 610 7-2

Adjusting Entries and Communication

The depreciation method used by Target is straight-line method. When using this method, the company reduces the value of its assets uniformly over a given number of periods until the salvage value of the asset is obtained. This is the most used method for determining the cost of capital assets (Pratt & Peters, 2017). Through the straight-line method, the amount of depreciation is calculated by subtracting the salvage value of the asset from its cost then dividing the balance by the number of useful life years of the asset.

There are several reasons why the company uses the straight-line method of depreciation. For instance, when using this method, the depreciation balance of the asset is charged under the reducing balance of the particular asset for each year. The good thing with this approach is that the amount of depreciation keeps reducing with each year. Secondly, this method is appropriate for assets that have a higher utility during its earlier years of their useful life (Schroeder et al, 2019). This type of assets forms the larger percentage of the assets owned by Target. A good example of such assets is computer equipment. Computers function better during their earlier years. As time goes by, they become obsolete due to technological advancement. When depreciation is charged using the straight-line method, the depreciation amount is usually higher during the earlier years of the equipment.

One of the adjusted entries that appears on the balance sheet of Target is prepaid expenses. These are the assets that the company has paid for, but they get used gradually during the accounting period (Weygandt, Kimmel & Kieso, 2018). A good example of such an expense is when Target buys and pays for office supplies. During the accounting period, the purchased office supplies are used gradually. When they are fully used up, they become expenses. When Target buys office supplies and uses them, the accounting department of the company makes an adjusting entry on the debit side of the office supplies expense account and a credit entry to the credit side of the prepaid office supplies account.

Memo to CEO on Advantages and Disadvantages of transitioning from GAAP to IFRS

From: Controller

To: CEO

Date: November 22, 2021

Re: GAAP to IFRS Transition

I am writing to inform you of the advantages of transitioning from GAAP to IFRS. The first benefit that the company will see from such a transition is that losses will be recognized immediately. This is good for investors, lenders, and other company stakeholders. Secondly, using IFRS will lead to standardization of financial reporting. This is beneficial for the company since it will improve comparability across the primary financial markets. Another advantage of using IFRS is that it will lead to consistency and transparency of financial reporting. This is crucial since it improves the relationship between the company and investors.

However, IFRS has its disadvantages. The first disadvantage is that it raises concerns regarding manipulation of standards. This means that the company will be able to choose only the type of methods that will bring the results that we desire to see. This can lead to fraudulent activities. Secondly, IFRS increases the workload given to accountants. Transitioning to IFRS calls for a complete overhaul of the previously used strategies and processes. Finally, the transition process will create an adjustment period filled with tumult. Chances are high that there will be costly delays and mistakes that will occur during the transition process.

Kindly let me know if you have any question regarding this issue. In the meantime, I’d appreciate your cooperation as business operations take place.

Thank you.

Memo to CEO on Bankruptcy of Customer XYZ and Impact on Business

From: Controller

To: CEO

Date: November 22, 2021

Re: Bankruptcy of Customer XYZ and Impact on Business

I am writing to inform you regarding the bankruptcy of Customer XYZ and how this is going to affect our accounts receivables. Over the last several years, Customer XYZ has been struggling financially and they brought this to our attention. Unfortunately, the customer has filed for bankruptcy. As you already know, the accounts receivable balance that relates to Customer XYZ is at least $100,000. The implication of this is that, as per the provisions of the law, the amount owed to the customer is now uncollectible. Thus, the customer balance becomes a bad debt. Since our company has an account for allowance for bad debts, the funds therein will be used to cater for this loss. Therefore, during the accounting process, a debit entry for $100,000 will be made on the bad debt expenses accounts, while a credit entry will be posted on the allowance for doubtful debts account for the same amount. Further, the accounts receivable account will have to be credited by $100,000. The implication of this is that on the balance sheet, accounts receivable will reduce by $100,000. To cope with this, the company will have to come up with new strategies for obtaining new customers and retaining the current ones.

If you have any questions, don’t hesitate to contact me.

Thank you.

References

Pratt, J., & Peters, M. F. (2017). Financial accounting in an economic context. John Wiley &

Sons.

Schroeder, R. G., Clark, M. W., & Cathey, J. M. (2019). Financial accounting theory and

analysis: text and cases. John Wiley & Sons.

Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2018). Financial Accounting with International

Financial Reporting Standards. John Wiley & Sons.