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ACC 3010 – Intermediate Accounting I Fall 2014

Requirements for Ethics & Financial Reporting Case Assignment #1 The following specifies the requirements for Case Assignment #1. This assignment must be submitted at the beginning of the class period on Friday, October 17. Any assignment submitted late will incur a substantial penalty. Each  case  submitted  must  be  each  student’s  own  work; collaboration among students in completing these cases is not permitted (see the course syllabus for a further description of the Academic Dishonesty policy). Each case solution must be typed. Handwritten work will not be accepted and, if submitted, will not be graded. The cases will be graded based on the completeness of your answer and the clarity and form of your writing. Therefore, use of proper grammar and spelling are essential. Failure to do so will result in a reduction in points. You must include all supporting calculations with your solutions and these supporting calculations must be prepared with an Excel spreadsheet. For each case, you must submit one printed copy of the Excel spreadsheet which supports your case solution and a second printed copy displaying the formulas contained in each cell of the spreadsheet. Also, be sure to include any other information relevant to evaluating your work, and provide appropriate citations for any supporting facts and reference material, as necessary, in your completed assignment.

Case #1 Wright Products, Inc. assembles and installs customized furniture and fixtures for office and commercial settings in the Midwest region of the US. Wright began its operations in April 2013, and has a December 31 year end. All of Wright’s sales are made on a credit basis, with credit terms of net 30 days. Wright uses the allowance method to provide for uncollectible accounts receivable. During 2013, Wright provided for uncollectible accounts receivable with a monthly provision of 1.5% of credit sales. At December 31, 2013, the balance of the Allowance for Uncollectible Accounts was $42,700. During 2014, Wright wrote-off $96,500 of customer accounts that were deemed to be uncollectible, due to customers declaring bankruptcy or experiencing financial difficulties so severe that extensive collection efforts were not successful. One customer’s account with a $5,000 balance which had been written-off (and is included in the $96,500 amount above) was subsequently collected from the customer. Wright maintained the same monthly provision of 1.5% of credit sales throughout 2014. Monthly sales for 2014 are as follows:

January $ 197,400 February 212,800

March 232,400 April 240,000 May 289,000 June 263,000 July 375,000 August 380,600 September 395,400 October 319,000 November 289,400 December 263,800

As Sue Smith, Wright’s controller, was preparing adjusting entries for the current year ending December 31, 2014, she assembled the following aging of Accounts Receivable, assigning probabilities of collection based on discussions with Wright’s credit manager:

Age of Account Receivable Amount Probability of Collection 0-30 days past due $ 402,600 96% 31-60 days past due 89,900 80%

61-90 days past due 58,400 65% greater than 90 days past due 23,200 15%

After evaluating the above information, Sue became concerned that unadjusted balance in the Allowance for Uncollectible Accounts should be adjusted based on the year-end aging of Accounts Receivable. After preparing an adjusting journal entry, she met with Wright’s CEO, Ken Madoff and proposed that this entry be recorded. Ken strongly resisted this suggestion, saying, “Don’t you realize we need to report as much income as possible this year? Our investors are expecting our results to improve dramatically. Besides, it would be inconsistent for us to change how we are estimating our uncollectible accounts. I don’t think the Board of Directors would be happy to see us making a change, especially one that hurts our ‘bottom line.’” Sue left this meeting very disappointed and uncomfortable about how she should proceed.

Requirements a) Prepare an analysis computing the unadjusted balance in the Allowance for Uncollectible Accounts as of 12/31/14. b) Prepare the adjusting journal entry based on the aging of Accounts Receivable that Sue presented to the CEO. c) Should the adjustment you prepare in Part b (above) be recorded by Wright? Explain why. Also, based on the results of the meeting with the CEO, how should Sue proceed? What is the ethical course of action for her?