BAV Energy is a large utility company based in Randwick, Sydney. In its 60 years history, BAV Energy has provided electricity and gas to thousands of households and companies. Recently, the new CEO of BAV Energy, who took office 3 months ago, announced that the company would increase electricity and gas prices, in response to the soaring oil and coal prices. Last week, the company released its annual financial statements for fiscal year 2018. Sales revenue increased 10% to $880 million, but earnings decreased 15% to $75 million.

After analyzing its annual reports, you find that the following accounts are suspicious:

	2018	2017
Accounts Receivable	165 million	150 million
Allowance for Doubtful Debts	65 million	15 million

Required:

1. You believe that the Allowance for Doubtful Debt has been overstated. Assume BAV Energy has an effective tax rate of 30%. (a) Try to estimate the amount of overstatement. (b) Make necessary adjustments to the balance sheet and income statement to correct the overstatement. (10 marks)

2. Briefly discuss two possible reasons why BAV Energy overstated its Allowance for Doubtful debts. (4 marks)

3. If BAV Energy understated its earnings, what could be six other red flags you can possibly identify in its annual financial statements? (6 marks)