Letni Corporation engages in the manufacture and sale of semiconductor chips for the computing and communications industries. During the past year, operating revenues remained relatively flat compared to the prior year but management notices a big increase in accounts receivable. The increase in receivables is largely due to the recent economic slowdown in the computing and telecommunications industries. Many of the company’s customers are having financial difficulty, lengthening the period of time it takes to collect on accounts. Below are year-end amounts. Age Group Operating Revenue Accounts Receivable Average Age Accounts Written Off Two years ago $1,160,000 $136,000 5 days $0 Last year 1,460,000 146,000 7 days 1,000 Current year 1,560,000 316,000 40 days 0 Paul, the CEO of Letni, notices that accounts written off over the past three years have been minimal and, therefore, suggests that no allowance for uncollectible accounts be established in the current year. Any account proving uncollectible can be charged to next year’s financial statements (the direct write-off method). 2. Suppose that other companies in these industries have had similar increasing trends in accounts receivable aging. These companies also had very successful collections in the past but now estimate uncollectible accounts to be 15% because of the significant downturn in the industries. If Letni uses the allowance method estimated at 15% of accounts receivable, what should be the balance of Allowance for Uncollectible Accounts at the end of the current year? Allowance for Uncollectible Accounts
Letni Corporation engages in the manufacture and sale of semiconductor chips for the computing and communications industries. During the past year, operating revenues remained relatively flat compared to the prior year but management notices a big increase in accounts receivable. The increase in receivables is largely due to the recent economic slowdown in the computing and telecommunications industries. Many of the company’s customers are having financial difficulty, lengthening the period of time it takes to collect on accounts. Below are year-end amounts.
| Age Group | Operating Revenue |
Accounts Receivable |
Average Age |
Accounts Written Off |
|||||
| Two years ago |
$1,160,000 |
$136,000 | 5 | days | $0 | ||||
| Last year | 1,460,000 | 146,000 | 7 | days | 1,000 | ||||
| Current year |
1,560,000 |
316,000 | 40 | days | 0 | ||||
Paul, the CEO of Letni, notices that accounts written off over the past three years have been minimal and, therefore, suggests that no allowance for uncollectible accounts be established in the current year. Any account proving uncollectible can be charged to next year’s financial statements (the direct write-off method).
2. Suppose that other companies in these industries have had similar increasing trends in accounts receivable aging. These companies also had very successful collections in the past but now estimate uncollectible accounts to be 15% because of the significant downturn in the industries. If Letni uses the allowance method estimated at 15% of accounts receivable, what should be the balance of Allowance for Uncollectible Accounts at the end of the current year?
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