Marvin Company is a subsidiary of Hughes Corp. The controller believes that the yearly allowance for doubtful

Question:

Marvin Company is a subsidiary of Hughes Corp. The controller believes that the yearly allowance for doubtful accounts for Marvin should be 8% of gross accounts receivable. Given the recession and the high interest rate environment, the president, nervous that the parent company might expect the subsidiary to sustain its 10% growth rate, suggests that the controller increase the allowance for doubtful accounts to 9%. The president thinks that the lower net income, which reflects a 6% growth rate, will be a more sustainable rate for Marvin Company.


Instructions

a. In a recessionary environment with tight credit and high interest rates:

1. Identify steps Marvin Company might consider to improve the accounts receivable situation.

2. Then evaluate each step identified in terms of the risks and costs involved.

b. Should the controller be concerned with Marvin Company’s growth rate in estimating the allowance? Explain your answer.

c. Does the president’s request pose an ethical dilemma for the controller? Give your reasons.

Accounts Receivable
Accounts receivables are debts owed to your company, usually from sales on credit. Accounts receivable is business asset, the sum of the money owed to you by customers who haven’t paid.The standard procedure in business-to-business sales is that...
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Related Book For  book-img-for-question

Intermediate Accounting

ISBN: 978-1119503668

17th edition

Authors: Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfiel

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