AC 303 March 12, 2008 Ethics Case 7-4 page 347 What is the effect on income before taxes of the change requested by the controller? The controller asked for the allowance for uncollectible accounts to change from $180,000 to $135,000. This would cause income before taxes to increase a significant amount of $45,000. Discuss the ethical dilemma you face. Consider your options and responsibilities along with the possible consequences of any action you might take. There are two common ways to estimate bad debt. One way involves using a percentage of each period’s net credit sales from the income statement, and the second estimates the net realizable value of accounts receivable to be reported in the balance sheet. Most likely, the longer an account has been outstanding the more likely it will prove uncollectible. Accounts that are more than 120 days old have the most bad debts estimated. Also, the percentage is usually determined by recent history of the relationship between credit sales and actual bad debts. The aging accounts were prepared
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