Swiffer Shocks hired you right out of school to work in its accounting department. Swiffer Shocks provides computer and network maintenance services to a wide range of corporate customers. Customers are expected to pay on the first of each month, in advance of receiving services. One of your customers, Dunder has been a customer for over ten years. However, Dunder did not pay for the last four months of services in 20X1; nevertheless, to maintain a positive relationship, Swiffer Shocks continued to provide services during that time. After providing services in January and February of 20X2, Swiffer Shocks ceased providing services. In March of 20X2, Swiffer Shocks discovered that Dunder filed for bankruptcy in August of 20X1. You now believe that the collection of the missed payments is extremely unlikely.

Swiffer Shocks has already issued its annual financial statements for the year ended December 31, 20X1. These statements reflected Dunder's $11,000 per month in revenue with a corresponding account receivable. The financial statements also reflected Swiffer Shocks' standard allowance (reserve) amount on receivables of 3% of sales. In total, your company's average monthly sales amount to about $300,000.

Adriana Ramos, Swiffer Shocks CFO, is not sure what to do since the December 31, 20X1 financial statements have been issued and provided to its lenders. Ana has asked you to research about the December 31, 20X1 financial statements.

Required:

Need a professional research memo to Adriana Ramos, CFO.

Be sure to address the following in the memo (these items are NOT the issue - just be sure to discuss these items):

1. Evaluate whether receipt of this information indicates you have a change in estimate or whether the customer's bankruptcy results in this event being considered an error in previously issued financial statements.
2. Describe the accounting treatment required by the Codification for each alternative. Support your explanations with draft journal entries ("Financial Statement and Disclosure Impacts" section after the conclusion)
3. Briefly, state which treatment appears to be more appropriate (your recommendation) given the circumstances. Be sure to describe any assumptions you made in reaching this conclusion.