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AT&T reported accounts receivable, net, of $96.0 million in 2016 and an allowance for doubtful accounts...

AT&T reported accounts receivable, net, of $96.0 million in 2016 and an allowance for doubtful accounts of $4.0 million. After recording a material impairment expense for the Company’s international operations, Net income in 2016 was $0.4 million. If AT&T's managers had purposely underestimated the allowance for doubtful accounts by half a percentage point, how would the 2016 income statement be affected? What about future financial statements?

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Answer #1

Accounts receivable, gross = $ 96 million + $ 4 million = $ 100 million

Allowance for doubtful accounts percentage = $ 4 million / $ 100 million = 4 %

If allowance was underestimated by half a percentage point , allowance for doubtful accounts = $ 100 million x 3.5 % = $ 3.5 million

Bad debt expense in the income statement of 2016 would be understated by $ 500,000, and net income would be overstated by $ 500,000. Therefore, instead of $ 0.4 million, it would be $ 0.9 million.

Accounts receivable would be overstated by $ 500,000 at $ 96.5 million

Not only will the underestimation result in overstatement of accounts receivable in the balance sheet of 2016, there might also be writeoffs needed in subsequent years, if some of the accounts receivable are uncollectible. This would increase bad debt expense in later years.

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