Question: Willie Cheetum is the CEO of Happy Foods, a distributor of produce to grocery store chains throughout the Midwest. At the end of the year, the company's accounting manager provides Willie with the following information, before any adjustment.
- Accounts receivable $1,000,000
- Estimated percentage uncollectible 10%
- Allowance for uncollectible accounts $30,000 (credit)
- Operating income $250,000
- Willie's compensation contract states that if the company generates operating income of at least $200,000, he will get a salary bonus early next year.
Required: 1. Record the adjustment for uncollectible accounts using the accountant's estimate of 10% of accounts receivable.
2. After the adjustment is recorded in Requirement 1, what is the revised amount of operating income? Will Willie get his salary bonus?
3. Willie instructs the accountant to record the adjustment for uncollectible accounts using 7% rather than 10% of accounts receivable. Now will Willie get his salary bonus? Explain.
4. By how much would total assets and operating income be misstated using the 7% amount?