Just one, John saidand its only an idea that you might want to pitch to the management

team along with these other changes. We have used the percent of accounts receivable method to

calculate our Allowance for Bad Debt for several years. But we dont have to use that method.

What do you mean?Elsa asked. Isnt the percent of accounts receivable method one of the

best ways to calculate the Allowance?

Technically, yes, it is. However, we recently hired a new credit manager who has improved

our collections and tightened our credit policy for new customers. Because of these improvements,

we might not have to use the percent of accounts receivable method. Instead, we could switch back

to the percent of sales method that we used previously. By switching from using 12 percent of

accounts receivable to 2 percent of credit sales, we would reduce our allowance for bad debts

and our bad debt expense. That would offset some of these negative changes we have just discussed.

What were credit sales for the year? Simon asked.

About $1.25 million, and accounts receivable had an ending balance of $600,000 after we

wrote off $30,000 of uncollectible accounts. We wrote off almost $50,000 the year before, so our

collections really have improved. Honestly, I dont think that wed lose information quality by

switching methods. We dont really have to use any specific method for estimating bad debt

expense. I think we could make a case for the more relaxed estimation method, and I think the

positive effect of the change on net income might help the management team accept some of these

other adjustments. Elsa jumped in.

I dont see any problem with that. Simon frowned.

Im not sure I like the idea of changing methods solely to offset the negative

effects of these other adjustments. But go ahead and calculate how switching methods would affect

our bad debt expense. Well meet again tomorrow morning, after Ive talked with Jane and Doug

about how to handle these issues.

Estimate 1	Estimate 2
Current Sales Price	$750	$600
Historical Cost	$850	$850
Replacement Cost	$700	$500
Disposal Cost	$65	$70
Typical Markup	$200	$175
Units in Inventory	62	62

a. Based on the information provided in the take, calculate the write-down that would be necessary using the first set of assumptions.

b. Based on the information provided in the table claculate the write-down that would be necessary using the second set of assumptions.

c. Assuming that Frosty Co.'s management team decided to use the fist set of estimates, what correcting entries wouldd need to be made to write down inventory? (assume that Frosty Co. uses the direct write-off method)

d. What correcting entries would need to be made to write down inventory if the team decided to use the second set of estimates?

e. What would be the net effect of each of these inventory adjustments on net income? what would be the net effect on EPS?