Background: Judgment can at times be required to determinewhether an event should be accounted for as a change in accountingestimate or as the correction of an error. The accounting for thesetopics is addressed in ASC 250 (Accounting Changes and ErrorCorrections). After reading the following fact pattern, you will bechallenged to evaluate whether an event is an error correction orchange in estimate, and you will be asked to discuss thedifferences in the accounting treatment for these twoalternatives.
Facts: You are the owner of a lawn service company (LawnCo)which provides grounds and maintenance services to a range ofcorporate customers. Customers are expected to pay on the first ofeach month, in advance of receiving services. One of your corporatecustomers is an eldercare facility whose grounds you havemaintained for many years. The customer has not paid for the lastthree months of services (from Oct.-Dec. 20X1); nevertheless, tomaintain a positive relationship, your company continued to providemowing and weed control services to the eldercare facility duringthat time. Your company ceased providing services in January 20X2and found out in that same month that the eldercare facility filedfor bankruptcy in September. Your company now believes thatcollection of the missed payments is extremely unlikely. Yourcompany has already issued financial statements (for the periodending 12/31/X1) which reflected revenue and a correspondingaccount receivable related to this customer of $10,000 per monthfor services provided to this customer. Those financial statementsalso reflected the companyâs standard allowance (reserve) amount onreceivables, of 4% of sales. In total, your companyâs averagemonthly sales amount to $500,000.
Required:
1. Evaluate whether receipt of this information indicates youhave a change in accounting estimate or whether the customerâsbankruptcy should result in this event being considered an error inpreviously issued financial statements. First, locate thedefinitions of these terms; next, provide a list of factors whichwould support each alternative.
2. Next, describe the accounting treatment (as required by theCodification) for each alternative, then support your explanationswith draft journal entries. You are not required to provide detailon how financial statements would be presented/prepared, ratherfocus on describing the Codificationâs requirements and how theyrelate to this issue, and include journal entries that you believeare consistent with those requirements.
3. Finally, briefly state which treatment appears to be moreappropriate given the circumstances. If you must make anyassumptions in reaching this conclusion, state these.
Background: Judgment can at times be required to determinewhether an event should be accounted for as a change in accountingestimate or as the correction of an error. The accounting for thesetopics is addressed in ASC 250 (Accounting Changes and ErrorCorrections). After reading the following fact pattern, you will bechallenged to evaluate whether an event is an error correction orchange in estimate, and you will be asked to discuss thedifferences in the accounting treatment for these twoalternatives.
Facts: You are the owner of a lawn service company (LawnCo)which provides grounds and maintenance services to a range ofcorporate customers. Customers are expected to pay on the first ofeach month, in advance of receiving services. One of your corporatecustomers is an eldercare facility whose grounds you havemaintained for many years. The customer has not paid for the lastthree months of services (from Oct.-Dec. 20X1); nevertheless, tomaintain a positive relationship, your company continued to providemowing and weed control services to the eldercare facility duringthat time. Your company ceased providing services in January 20X2and found out in that same month that the eldercare facility filedfor bankruptcy in September. Your company now believes thatcollection of the missed payments is extremely unlikely. Yourcompany has already issued financial statements (for the periodending 12/31/X1) which reflected revenue and a correspondingaccount receivable related to this customer of $10,000 per monthfor services provided to this customer. Those financial statementsalso reflected the companyâs standard allowance (reserve) amount onreceivables, of 4% of sales. In total, your companyâs averagemonthly sales amount to $500,000.
Required:
1. Evaluate whether receipt of this information indicates youhave a change in accounting estimate or whether the customerâsbankruptcy should result in this event being considered an error inpreviously issued financial statements. First, locate thedefinitions of these terms; next, provide a list of factors whichwould support each alternative.
2. Next, describe the accounting treatment (as required by theCodification) for each alternative, then support your explanationswith draft journal entries. You are not required to provide detailon how financial statements would be presented/prepared, ratherfocus on describing the Codificationâs requirements and how theyrelate to this issue, and include journal entries that you believeare consistent with those requirements.
3. Finally, briefly state which treatment appears to be moreappropriate given the circumstances. If you must make anyassumptions in reaching this conclusion, state these.
