Allowance for Uncollectible Accounts—Ethics vs. Conservatism To aid in determining the balance for the allowance for uncollectible accounts, an aging schedule is often prepared. The Arrow Company prepared the following aging schedule for December 31, 2009:
|
ARROW COMPANY |
|||
|
Age of Accounts |
Receivable |
Estimate Percent |
Estimated |
|
Current |
$120,000 |
1.50% |
$1,800 |
|
1–30 days past due |
40,000 |
2 |
800 |
|
31–60 days past due |
30,000 |
3 |
900 |
|
61–90 days past due |
20,000 |
4 |
800 |
|
Over 90 days past due |
25,000 |
7 |
1,750 |
|
Total |
$235,000 |
$6,050 |
|
The current balance in allowance for uncollectible accounts is $2,000. The president of Arrow Company directs that the allowance be adjusted to $12,000. His reasoning is that 2009 has been a bad year for profits. Additional expenses this year will hardly be noticed, and this will help profits in future years.
Required
a. 1. If the allowance for uncollectible accounts is adjusted to $6,050, how much will this add to expense for 2009?
2. If the allowance for uncollectible accounts is adjusted to $12,000, how much will this add to expense for 2009?
b. Is the president’s direction an example of conservatism or unethical? Comment.