Question

You have recently been hired as the assistant controller for Stetson Industries, a large, publicly held manufacturing company. Your immediate superior is the controller who, in turn, is responsible to the senior vice president of finance. The controller has assigned you the task of preparing the year-end journal entries. For accounts receivable, you have prepared an aging of A/R and have applied historical percentages to the balances of each of the age categories. The analysis indicates that an appropriate balance for the allowance for uncollectible accounts is $170,000. The existing balance is the allowance account prior to any adjustment is a $15,000 credit balance. When you review your analysis with the controller, she tells you to change the aging category of a large account from over 150 days to current status and to prepare a new invoice to the customer with a revised date that agrees with the new aging category. This will change the required allowance for uncollectible accounts from $170,000 to $125,000. Carefully, you ask for an explanation for the change, and the controller's reply is, "We need the extra income, the bottom line is too low." Indicate the amount of the effect on income before taxes for the change requested by the controller, and discuss the ethical dilemma you face. Consider your options and responsibilities along with the possible consequences of your action

Answer 1

Allowance for doubtful accounts line item will reduce the net income in the income statement, so if the no in allowance for doubtful accounts is higher the lower the net income before taxes will be in Income statement. Here the allowance needs to be 170000-15000=155000, but was asked to make it 125000 so the income before taxes will increase by =125000-15000=110000 and change is 155000-110000=45000

Ethically we are not supposed to do this and this can be caught while doing internal audit.