Required: 1. Calculate the balance that should be reported in Allowance for Doubtful Accounts as of December 31. 2. Prepare the adjusting journal entry that is required on December 31. 3. Show how Accounts Receivable would be reported on the balance sheet at December 31. 4. If the balances for CT&T, New Tel, and Telemedia at the end of November continued to exist at the end of December (in the over-120-days category), what balance would you have estimated for the Allowance for Doubtful Accounts on December 31? Would this have changed MCI's net income in the current year? Explain. 5. A few days later, you overhear Mr. Pavlo talking about the account receivable from Hi-Rim. Apparently, MCI will soon loan Hi-Rim some money, creating a note receivable. Hi-Rim will use the money to pay off the Accounts Receivable balance it owes to MCI. You are aware that Mr. Pavlo receives a bonus based on MCI's net income. Should you investigate this matter further? Explain why or why not. Epilogue: The events described above are based on an article in the June 10, 2002, issue of Forbes magazine that describes how Walter Pavlo was pressured to commit accounting fraud at MCI. Ironically, MCI was later taken over by World Comthe company that went on to commit the world's largest accounting fraud at the time. 58-4 Ethical Decision Making: A Real-Life Example LO 8-20, 8-30 You work for a company named MCI and you have been assigned the job of adjusting the company's Allowance for Doubtful Accounts balance. You obtained the following aged listing of customer account balances for December. Total >120 days Customer AfriTel CT&T 40,000 0 0 28,000 35,000 GlobeCom Hi-Rim Level 8 New Tel Telemedia Others TOTAL Accounts Receivable Aged Listing-December 31 030 days 3160 days 6190 days 91120 days 20,000 10,000 5,000 5,000 0 0 0 0 18,000 8,000 1,000 0 0 0 0 63,000 44,000 29,000 13,000 0 0 0 0 0 0 0 257,000 188,000 28,000 11,000 340,000 260,000 70,000 30,000 0 0 1,000 35,000 13,000 0 0 1,000 162,000 0 0 0 485,000 750,000 50,000 Bad debt loss rates for each aging category are estimated to be 1% (030 days), 5% (3160 days), 8% (6190 days), 10% (91120 days), and 50% (> 120 days). Using these rates, you calculate a desired balance for the allowance. No entries have been made to the account since the end of November, when the account had a credit balance of $46,820. To check the reasonableness of the calculated balance, you obtain the aged listings for prior months (shown below). As you scan the listings, you notice an interesting pattern. Several account balances, which had grown quite large by the end of November, had disappeared in the final month of the year. You ask the accounts receivable manager, Walter Pavlo, what happened. He said the customers obtained some financing ... I guess out of nowhere and they must have used it to pay off their account balances. Page 391 Q4 (November 30) 20,000 100,000 Customer AfriTel CT&T GlobeCom Hi-Rim Level 8 New Tel Telemedia Others Q1 (March 31) 19,000 0 29,000 0 229,000 0 0 524,000 801,000 Total Accounts Receivable as of ... Q2 Q3 (June 30) (September 30) October 31) 19,000 21,000 16,000 30,000 100,000 100,000 28,000 31,000 27,000 0 25,000 35,000 229,000 198,000 174,000 0 25,000 25,000 0 2,000 2,000 489,000 375,000 503,000 795,000 777,000 882,000 December 31) 40,000 0 28,000 35,000 28,000 35,000 162,000 0 190,000 25,000 2,000 463,000 0 485,000 TOTAL 863,000 750,000