From: Advisory Accountant
Re: Accounting policies and operating results
1.Allowance for Doubtful accounts
a.Doubling the historical trend isn’t justified just because a recession is on its way. The percentage is too large for such an uncertain situation. Even though a recession is coming, these customers may be perfectly well on their reputation of paying back; Chan shouldn’t be too over concerned. Alternatives:
a.Chan should recalculate the estimate of doubtful accounts if percentage of sales is to be used. b.Or, use the same method (Identification method) as he and Baaz have been doing it in prior years. Analysis of Issues:
a.In a way, doubling the percentage of doubtful accounts is a safe move for Chan, as Baaz still holds interest in the receivables. If any portion becomes uncollectable, Chan solely bears the risks associated. However, buy-out agreement would nullify this procedure, as Baaz’s equity would adjust to any uncollectible receivables and allowance excess. In addition, no matter how big the receivables are, 5 years is more than enough time to collect or write them off. Recommendation:
a.My recommendation is to recalculate the allowance according to last years, using the same Identification method used in prior years. Chan will need the data Baaz used when he calculated his allowance.
a.A sizable amount of inventory has been written off, yet still physically there in the warehouse. Therefore a future sale of these inventories is still possible. Alternatives:
a.If the inventory is as big as it sounds, they should reconsider doing some marketing research on why the product isn’t selling so well, lower prices, promotions for the items, or give them out as promotions, find any way to turn the inventory into revenue rather than disposing it. However Chan and Baaz will need to discuss on their choices. b.If no revenue can be made, Chan will need to explain to Baaz regarding this huge...