Background:

ABC Company began operations on 1/1/Year 1, and at the end of the first year, management decided to use the allowance method for reporting uncollectible accounts. The following information pertains to ABCs receivables for its first two years of operations:

Year 1

A/R 12/31/Year 1 = $1,000,000

Percentage of A/R balance expected to be uncollectible = 10%

Year 2

A/R 12/31/Year 2 = $1,500,000

Percentage of A/R balance expected to be uncollectible = 10%

Accounts deemed uncollectible = $95,000

Scenario 1:

Year 1: In line with expectations, the company uses the 10% rate in determining the allowance for doubtful accounts.

Year 2: In line with expectations, the company uses the 10% rate in determining the allowance for doubtful accounts.

Scenario 2:

Year 1: Instead of using the 10% rate in determining the allowance for doubtful accounts, the company uses 5%.

Year 2: In line with expectations, the company uses the 10% rate in determining the allowance for doubtful accounts.

Scenario 3:

Year 1: Instead of using the 10% rate in determining the allowance for doubtful accounts, the company uses 15%.

Year 2: In line with expectations, the company uses the 10% rate in determining the allowance for doubtful accounts.

Requirements:

1. (1 point) For each scenario, determine the bad debt expense for Year 1 and Year 2 and the net realizable value of A/R at the end of Year 1 and Year 2. You can simply provide the numbers in the following format for each scenario:

SCENARIO ______	Year 1	Year 2
Bad Debt Expense
A/R, net (i.e. net realizable value)

2. (2 points) Briefly discuss the financial statement implications in Scenario 2. Specifically, how did the deviation from the expected rate in Year 1 impact the financial statements in Year 1 and Year 2.
3. (2 points) While the percentage used in Year 1 of Scenario 3 by ABC is different from the 10% expectation, it will result in a higher amount of bad debt expense for the year. Assume the company Chief Financial Officer (CFO) suggests this move was made in order to exercise additional care in not overstating its net income or the net realizable value of A/R. Is the CFOs approach appropriate? Explain.