ETHICS CASE Preston Enterprises uses the direct write-off method of accounting f
ID: 2584152 • Letter: E
Question
ETHICS CASE Preston Enterprises uses the direct write-off method of accounting for uncollectible accounts. On October 12, a very large account was written off. The amount was subse- quently recovered on December 15. Ray Preston, the owner of the company, instructed t to not make a journal entry for the recovery and to hold the check in his desk until after the first of the year "for tax purposes." 1. If you were the accountant, what would you think of Preston's request? 2. If the December 15 entry is not made, how will it affect Preston's current year financial statements? 3. Assume the amount of the charge-off and the subsequent recovery was $10,000. Prepare the proper journal entries for October 12 and December 15. 4. In groups of two or three, discuss the possible consequences for the accountant holding the check in his desk drawer for a couple of weeks. MASTERY PRORIEMExplanation / Answer
1. Company has incurred bad debts and then it is record in the same accounting year. So it should record this recovery.
Company's owner Preston want to show less profit so that tax liability can be reduced.
As an accountant of the company, it is not a right thing to hide income. So we will not support Preston's view.
2. If Entry on December 15 is not made, then company's income will be overstated and taxable income for the year will be reduced. So ultimately tax payable will be reduced for the company.
3. Journal Entries
October 12 - On Write off the Account Receivable
Bad Debts Debit
Accounts Receivable Credit
(To write off account)
Dec 15 - On Receovery
Cash Debit 10,000
Bad Debts Recovered Credit $10,000
(Amount received which previously written off)
4. If Accountant keeps the cheque in his drawer and does not record income in this year, then current year income will be reduced and tax payable will be less.
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