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Johnny Goodman Inc (JGI) is a large public company that operates in the brewing industry.   Selected...

Johnny Goodman Inc (JGI) is a large public company that operates in the brewing industry.   Selected financial information from their most recent financial statements for the year ending December 31, 2010 is presented below.

Current Assets: $24,500

Current Liabilities: $2,800

JGI currently uses the AR (Accounts receivable) aging method to value their AFDA (allowance for doubtful accounts). The controller tells you that if he had used the percentage of Sales method, the AFDA balance would have been $25 higher. Therefore, if JDI used the percentage of Sales method to value the AFDA instead of the AR Aging method, what would be the amount of the working capital?

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Answer #1

Current assets = $24,500

Current liabilities = $2,800

If percentage of sales method is used, allowance for doubtful accounts would be $25 higher.

Higher llowance for doubtful accounts will reduce accounts receivable by $25.

Due to decrease in Accounts receivable by $25, current assets will also decrease by $25.

Current assets (If percentage of sales method is used) = 24,500 - 25

= $24,475

Working capital = Current assets - Current liabilities

= 24,475 - 2,800

= $21,675

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