Case: INCOME EFFECTS OF UNCOLLECTIBLE ACCOUNTS
The credit manager and the accountant for Goldsmith Company are attempting to assess the effect on net income of writing off $100,000 of receivables. Goldsmith uses the aging method of determining bad debt expense and has the following aging schedule for its accounts receivable at December 31, 2009:
| Accounts Receivable Category |
Amount |
Proportion Expected to Default |
|
Current
|
$2,980,400
|
0.004
|
|
1-30 days past due
|
722,600
|
0.035
|
|
31-60 days past due
|
418,500
|
0.095
|
|
Over 60 days past due
|
322,800
|
0.250
|
|
|
$4,444,300
|
|
The receivables being considered for write-off are all over 60 days past due.
Required:
1. Assume that the tax rate is 30 percent. What will be the effect on net income if the $100,000 is written off?
2. What data would you examine to provide some assurance that a company was not holding uncollectible accounts in its accounts receivable rather than writing them off when they are determined to be uncollectible?