Excerpts from the 1996 financial statements of Finley, Ltd., a service company, follow. Fees earned $240,000 Accounts receivable 68,000 Allowance for doubtful accounts 3,400 Total current assets 105,000 Total current liabilities 65,000 Net income 15,000 Dividends declared 5,000 Bad debt charge 3,400 Chapter 6 The Current Asset Classification, Cash, and Accounts Receivable 303 Auditors from Price and Company reviewed the financial records of Finley and found that a credit sale (for services rendered) of $10,000, which was included in the Fees earned amount above, should not have been recognized until January 20, 1997. The auditors also noted that a more reasonable estimate of future bad debts would be 10 percent of the Accounts Receivable balance. The auditors have informed Finley’s management that the audit opinion will be qual¬ ified if Finley does not adjust the financial statements accordingly. REQUIRED:

a. Compute the effect of the auditor’s recommended adjustment on the 1996 Fees Earned, / Accounts Receivable, Allowance for Doubtful Accounts, current ratio, working capital, t_ and net income reported by Finley.

b. Assume that Finley has a loan agreement with a bank requiring it to maintain a current ratio of 1.5 and limiting its annual dividend payment to 50 percent of net income. How might these restrictions have influenced the reporting decisions of Finley’s managers?