Mini-Case # 1
You are the owner of a lawn service company (Grass Man). Yourslogan is, âWho is that Grass Man?â Your company provides groundsand maintenance services to a range of corporate customers.Customers are expected to pay on the first of each month, inadvance of receiving services. One of your corporate customers isan eldercare facility whose grounds you have maintained for manyyears. The customer has not paid for the last three months ofservice (from October through December of 2015); nevertheless, tomaintain a positive relationship, your company continued to providemowing and weed control services to the eldercare facility duringthat time. Your company stopped providing services in January of2016 and found out in that same month that the eldercare facilityfiled for bankruptcy in September of 2015. Your company nowbelieves that collection of the missed payments is extremelyunlikely.
Your company has already issued financial statements to lenders(for the period ending 12/31/2015) which reflected revenue and acorresponding account receivable related to this customer of$10,000 per month for services that your company provided to theeldercare facility. Those financial statements also reflected thecompanyâs standard allowance (reserve) amount on receivables, of 4%of sales. In total, your companyâs average monthly sales amount to$500,000.
Evaluate whether finding out about your clientâs bankruptcyindicates that you have a change in accounting estimate oran error in previously issued financial statements.Describe the accounting treatment (as required by the Codification)that appears to be more appropriate given the circumstances. Stateany assumptions that you make in reaching your conclusion. Makesure to use in-text citations and references for the parts of theCodification that you use, and explain your recommendation.
Mini-Case # 1
You are the owner of a lawn service company (Grass Man). Yourslogan is, âWho is that Grass Man?â Your company provides groundsand maintenance services to a range of corporate customers.Customers are expected to pay on the first of each month, inadvance of receiving services. One of your corporate customers isan eldercare facility whose grounds you have maintained for manyyears. The customer has not paid for the last three months ofservice (from October through December of 2015); nevertheless, tomaintain a positive relationship, your company continued to providemowing and weed control services to the eldercare facility duringthat time. Your company stopped providing services in January of2016 and found out in that same month that the eldercare facilityfiled for bankruptcy in September of 2015. Your company nowbelieves that collection of the missed payments is extremelyunlikely.
Your company has already issued financial statements to lenders(for the period ending 12/31/2015) which reflected revenue and acorresponding account receivable related to this customer of$10,000 per month for services that your company provided to theeldercare facility. Those financial statements also reflected thecompanyâs standard allowance (reserve) amount on receivables, of 4%of sales. In total, your companyâs average monthly sales amount to$500,000.
Evaluate whether finding out about your clientâs bankruptcyindicates that you have a change in accounting estimate oran error in previously issued financial statements.Describe the accounting treatment (as required by the Codification)that appears to be more appropriate given the circumstances. Stateany assumptions that you make in reaching your conclusion. Makesure to use in-text citations and references for the parts of theCodification that you use, and explain your recommendation.
