Max is very happy with the work you have done in tidying up his inventory recording and valuation systems and is quite confident that his reports will now give him more useful information and provide him with a truer picture of the position and performance of the business However, Max is now concerned that some of the other areas of his business could need a review given some the problems found with the recording of inventory. Max has explained to you that he is still a little confused about the entries required when he was considering purchasing "Ray's Motors". In particular Max is still unsure about the discrepancy between the fair value of accounts receivable and their historic cost and why the fair value was not recorded in a similar way to the other assets. Max is also concerned that his accounts receivable have become a significant proportion of his assets. Prior to expanding his business operations Max had been owed no more than a few hundred dollars. At present his accounts receivable figure totals $26,500 and this increased to $56,419 once Max purchased the group of assets and started producing his DIY Clean Air Turbo Systems. Max has been able to ascertain that at the beginning of the financial year the fair value of his accounts receivable was $52,205. Required 2 [edit] Explain to Max that he has misunderstood what you meant when you told him to record bad debts "when they occur" and why his entry does not fit with the allowance method of accounting for bad debts that he is currently using. (Note - In Case Study 2 you created an Allowance for Doubtful Debts account with a $800 balance, Max has not touched this account since). In your explanation point out to Max the differences between the direct write-off and allowance methods and why the allowance method is preferred. Max now feels he has a better grasp of why the allowance method he is using is a good option but is still not sure how it actually works. Max recalls something about a net sales method and ageing receivables from his studies but doesn't know how to apply them. You have been able to gather together the following information about Max Armim Torque's debtors from Max's records, The details below have already taken into account the write off in Part 2 AGE OF ACCOUNTS AMOUNT UNCOLLECTABLE (incl. GST) ESTIMATE % 0-1 month 21,725.00 2 1 -6 months 18,928.80 11 6-12 months 9,880.20 46 over 12 months 1.980.00 92 52.514.00 You have also been able to ascertain that Max's revenues for the past year consist of Credit Sales and Installations $68,700 Cash Sales and Installations $48,200 - Sales Returns $ 7,200 (returns are only available on credit sales)