Astro Technology, Inc. (â€œAstro Techâ€) hired you right out of school to work in its accounting department. Astro Tech provides computer and network maintenance services to a wide range of corporate customers. Customers are expected to pay on the first of each month, in advance of receiving services. One of your customers, Dunder Mifflin Paper Company (â€œDunderâ€), has been a customer for over ten years. However, Dunder did not pay for the last four months of services in 20X1; nevertheless, to maintain a positive relationship, Astro Tech continued to provide services during that time. After providing services in January and February of 20X2, Astro Tech ceased providing services to Dunder. In March 20X2, Astro Tech discovered that Dunder filed for bankruptcy in August 20X1. You now believe that collection of the missed payments is extremely unlikely.
Astro Tech has already issued its annual financial statements for the year ended December 31, 20X1. These statements reflected Dunderâ€™s $11,000 per month in revenue with a corresponding account receivable. The financial statements also reflected Astro Techâ€™s standard allowance (reserve) amount on receivables of 3% of sales. In total, your company’s average monthly sales amount to about $300,000.
Alex Ngo, Astro Techâ€™s CFO, is not sure what to do since the December 31, 20X1 financial statements have been issued and provided to its lenders. Alex has asked you to research what to do about the December 31, 20X1 financial statements.
Prepare a professional accounting research memo.
Be sure to address the following in the memo:
- Evaluate whether receipt of this information indicates you have a change in estimate or whether the customer’s bankruptcy results in this event being considered an error in previously issued financial statements.
- Describe the accounting treatment required by the Codification for each alternative. Support your explanations with draft journal entries (â€œFinancial Statement and Disclosure Impactsâ€ section after the conclusion).
- Briefly, state which treatment appears to be more appropriate (your recommendation) given the circumstances. Be sure to describe any assumptions you made in reaching this conclusion