INDICADORES PARA LA VALORACIÓN DEL RIESGO

Requirement 2

a. Sales returns reserve is a contra-asset account, serving to reduce the carrying value of accounts receivable for the estimated amount of sales returns. Green Mountain is using the term “reserve” rather than

“allowance,” but the account serves the same purpose.

b.

Sales Returns Reserve

________________________________________

3,809 Beg. Bal.

31 Acquisition

40,139 charged to cost and expense Deductions 31,237

_________________

12,742 End. Bal.

c.

Sales returns (a contra-revenue account) ... ... 40,139

Sales returns reserve ... ... 40,139

This journal entry reduces revenue for $40,139 of estimated sales returns and increases the reserve by that amount. Note: They refer to this as

“amount charged to cost and expense,” but it actually is an amount charged to a contra-revenue account which has the same effect on income as an expense.

Sales returns reserve ... ... 31,237

Accounts receivable ... ... 31,237

This journal entry recognizes that returns of $31,237 occurred during the period, reducing both the sales returns reserve and accounts receivable.

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7–78 Intermediate Accounting, 7/e

d. In the operations section of the statement of cash flows, $40,139 is added back to net income because it is an amount that reduces net income (by being subtracted from revenue) but does not in itself use any cash. The $31,237 reduction in accounts receivable is included in the overall change in receivables of ($102,297). Deductions assumed to be 0

_________________

40,263 End. bal.

b.

Sales Returns Reserve

________________________________________

40,263 Beg. bal.

Recovery (from Antar) 22,259 Deductions assumed to be 0

_________________

18,004 End. bal.

c.

Sales returns reserve ... ... 22,259

Recovery of sales returns (increasing revenue) ... 22,259

This journal entry increases revenue by $22,259, the amount by which the sales returns reserve is being reduced.

© The McGraw-Hill Companies, Inc., 2013

Solutions Manual, Vol.1, Chapter 7 7–79

Real World Case 7–4 (concluded)

d. It could be that Green Mountain unintentionally overestimated returns in Q1 by a very large amount, and then experienced lower than expected returns and so had to reduce their allowance to correct their estimate. On the other hand, Green Mountain could have intentionally overestimated returns in Q1 as a way to shift income from Q1 to Q2, since income would be reduced by the estimated returns in Q1 and increased by the recovery in Q2.

© The McGraw-Hill Companies, Inc., 2013

7–80 Intermediate Accounting, 7/e

Requirement 1

Required allowance $180,000

Revised allowance 135,000

Increase in income before taxes of proposed change $ 45,000 Requirement 2

Discussion should include these elements.

Ethical Dilemma:

You, as the assistant controller, have a responsibility to follow GAAP and make a reasonably accurate estimate of the net realizable value of receivables. Is your responsibility to fairly present Stanton Industries’ financial statements to external users greater than your obligation to improve the financial position of your employer?

Alternative actions and consequences include:

1. Refuse to comply with the controller’s request to change the aging category of the large account.

Positive consequences:

a. Preservation of your honesty and integrity.

b. Fair presentation of the net realizable value of receivables.

Negative consequences:

a. Possible loss of your job.

b. Lower net income for Stanton Industries.

c. A devalued stock price for Stanton Industries.

2. Comply with the controller's suggestion to report the allowance for uncollectible accounts at $135,000.

Positive consequences:

a. Retention of your job.

b. A more favorable net income for Stanton Industries.

c. A more favorable position with unknowing creditors, financial analysts, current investors, and future investors.

Negative consequences:

a. Endure guilt feelings.

b. A lack of trust in you by other managers and employees.

c. Possible litigation from investors and creditors.

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Case 7–5 (concluded)

3. Report the controller’s suggestion to a higher level of management, the audit committee, or the auditors. If one of these parties corrects the controller and compels fair reporting of the allowance account, the consequences would be the same as in alternative 1 when you refuse to make the adjustment. Your job may still be in jeopardy due to the fact that management may consider whistle blowing as indicative of employee disloyalty. If the reportee parties agree with the controller and report the incorrect amount of $135,000, the consequences will be similar to those for the second alternative in 2, except that you run an even greater risk of losing your job.

4. Refuse to comply with the controller’s request and resign as assistant controller. If you report the controller’s suggestion to higher management, the audit committee, or the auditor, the positive and negative considerations are the same as for alternative 3. If you do not report the controller’s request, then the consequences are the same as for alternative 2. In either case, your job is not an issue since you have already resigned.

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7–82 Intermediate Accounting, 7/e

1. A weakness is created by the fact that John need only submit a list of accounts and amounts to be charged to replenish the petty cash fund. The supporting documentation for the petty cash disbursements also should be submitted with John’s list and reviewed by someone else. Surprise counts of the fund also should be made to ensure that the fund is being maintained on an imprest basis, that is, to ensure that cash and/or receipts equal $200 at all times.

2. The internal control system for disbursements does not contain sufficient separation of duties. Dean Leiser approves the vouchers, signs the checks, maintains the disbursement records, and reconciles the bank account. There should be at least one other person involved in these activities to ensure accuracy and to safeguard cash from expropriation.

3. The internal control system for receipts does not contain sufficient separation of duties. Fran Jones has physical control of the deposits and also maintains the subsidiary ledger for accounts receivable. These duties should be separated. In addition, the company should require that customers pay their bills via check and that cash not be used.

© The McGraw-Hill Companies, Inc., 2013

Solutions Manual, Vol.1, Chapter 7 7–83