1. The following is taken from the asset section of a recently issued annual report ($ in millions): Loans, net of unearned income $244,206 Allowance for possible credit losses (6,679) What sort of business do you think this company is in? (Their total assets are approximately $717 billion.) Explain the allowance in terminology that you have learned in this week. Is the basic accounting for these transactions the same as what you have learned for retailing? Don’t worry about additional industry-specific rules you may not know.
2. Anton Blair is the manager of a medium-sized company. A few years ago, Blair persuaded the owner to base a part of his compensation on the net income the company earns each year. Each December, he estimates year-end financial figures in anticipation of the bonus he will receive. If the bonus is not as high as he would like, he offers several recommendations to the accountants for year-end adjustments; one of his favorite recommendations if for the controller to reduce the estimate of doubtful accounts.
In your response, address the following:
What effect does lowering the estimate of doubtful accounts have on the income statement and balance sheet?
Do you believe Blair’s recommendation to adjust the allowance for doubtful accounts is within his right as a manager, or do you believe this action is an ethics violation? Justify your response.
What type of internal control(s) might be useful for this company in overseeing the manager’s recommendations for accounting changes?