SOLVED

20.3  Learning Objective 3 1) Why are retrospective adjustments to past years’ income and expenses recorded directly in retained earnings? 2) Zyler Company is analyzing its accounts receivable for purposes of preparing its financial report for the year ended December 31, 2017. The company uses the aging method to estimate bad debts. During this analysis, Zyler discovered that staff had written off a $55,000 account in 2017 even though the company had received information about the bankruptcy of the client in late 2016. The company has already recorded bad debts expense for 2017, but the general ledger for the year has not yet been closed. The following table provides information relating to Zyler’s accounts receivables just prior to the discovery of the $55,000 error: 2016 2017 Accounts receivable – gross $2,240,000 $2,460,000 Allowance for doubtful accounts (123,000) (145,000) Accounts receivable–net 2,117,000 $2,315,000 Bad debts expense $255,000 $236,000 Record any adjusting journal entries necessary to correct the error in Zyler’s accounts receivable. 3) Anfield Corp. is analyzing its accounts receivable for purposes of preparing its second- quarter financial report for June 30, 2017. For interim reporting, the company uses the percentage-of-sales method to estimate bad debts. During this analysis, Anfield identified an account for $42,000 that should have been written off in the first quarter ended March 31, 2017 but was actually written off in May 2017. The following table provides information relating to Anfield accounts receivables after recording the provision for bad debts for the quarter but prior to the discovery of the $42,000 error: March 31, 2017 June 30, 2017 Accounts receivable – gross 2,480,000 $2,560,000 Allowance for doubtful accounts (183,000) (195,000) Accounts receivable–net 2,297,000 $2,365,000 Bad debts expense $245,000 $278,000 The $42,000 should have been written off in the first quarter (Q1), so accounts receivable (A/R) and allowance for doubtful accounts (ADA) were overstated by this amount. However, since the company estimates bad debts using the percentage-of-sales method, the missing write-off did not have an effect on income. The account was eventually written off in the second quarter (Q2), so the balance sheet is correct by June 30, 2017. In summary, no adjusting entry needs to be made.