Question 2 2020 was a challenging year for Momo Hardware. Hit by sharp fall in sales, the company allowed credit sales for the first time. For the year 2020, total credit sales was $500,000 while year-end accounts receivable balance was $200,000.

When preparing the year-end accounts, the accountant proposed to write-off $10,000 as one of the customers is bankrupt. The accountant also proposed to estimate the accounts receivable that will likely be written off before they become uncollectible. Based on the aging of receivables, he estimated the amount of doubtful debts for the year to be $20,000.

However, the CEO objected to both proposals.

Explain to the CEO the need for both actions. In your explanations, you should cover: Why do you think the CEO did not agree to your proposals? What are the key differences between direct write-off method and the alternative method proposed by the accountant? Who is correct? Why? How would the proposals affect the financial statements? (25 marks)