Memo

Stanton Industries
To:

Vice President of Finance

From:

Student Name

CC:

Controller Accounts Receivable

Date:
Re:

Aging of Accounts Receivable

I am writing to you following a recent issue pertaining to the aging of an account in the
Allowance for Uncollectible Accounts aging approach. The account does not reflect what
I expected it to reflect. From my analysis, Allowance for Uncollectible Accounts balance
should be $180,000 respectively ($20,000 balance, before adjustment).
Noticing this issue, I decided to bring the issue to the attention of the Controller and he
decided to adjust the aging schedule of the Allowance for Uncollectible Accounts. He
changed the age of one large account from over 120 days, which is the correct status of
the account, to current status. In addition, he changed the date of the invoice related to the
account to correlate with the accounts new status. The result of this action was that the
required Allowance for Uncollectible account changed from $180,000 to $135,000.
The Controllers explanation for this decision was We need extra income, bottom line is
too low. Meaning that the expected Allowance for Uncollectible Accounts is high and so
the temporary general ledger account Bad Debt expense would be high as well causing
income before income taxes to be lower. However, because of the change in the aging of
the account, Allowance for Uncollectible Accounts is lower and so Income before Income
Taxes is higher.
This issue could easily be solved in two ways. Firstly, the issue could be solved by
writing-off the large account in Allowance for Uncollectible Accounts a bad debt expense

Memo
because the account is over 120 days. This would lower the Income before Income taxes
by value of the account because expenses decrease Income.
Secondly, we could contact the customer holding this large account and request for them
to take a Note Receivable with us and they can pay the amount owed ($45, 0001) as well
as accrued interest. This would have no immediate effect on the Income before Income
taxes, however, Allowance for Uncollectible Accounts would decrease and so would
Accounts receivable. Notes Receivable would increase and Interest revenue and Interest
receivable accrued would increase.
I have concluded that the best decision alternative in this situation is that this account
should be written-off as a bad debt expense rather than making the account part of the
current uncollectibles. This is because of the large time period that it has been kept in
Allowance for Uncollectible account. As an effect, the $45,000 will be taken out of the
Allowance for Uncollectible accounts, increase the value of operating expenses and
decrease the value of Income before Income taxes. I will take up this matter with the
controller and hopefully we he will understand my reasoning for this change.

1 Calculations shown in attached appendix