Excerpts from the 2020 financial statements of Finley Ltd., a service company, follow: Service revenue $240,000 Accounts receivable 68,000 Allowance for bad debts 3,400 Total current assets 105,000 Total current liabilities 65,000 Net income 15,000 Dividends 5,000 Bad debt expense 3,400 Auditors from Price and Company reviewed the financial records of Finley and found that a credit sale of $10,000 (for services rendered), which was included in the service revenue amount above, should not have been recognized until January 20, 2021. 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 qualified if Finley does not adjust the financial statements accordingly. Question: Compute the effect of the auditors’ recommended adjustment on the 2020 service revenue, accounts receivable, allowance for bad debts, current ratio, working capital, and net income reported by Finley. Then 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
Excerpts from the 2020 financial statements of Finley Ltd., a service company, follow:
| Service revenue | $240,000 |
| Accounts receivable | 68,000 |
| Allowance for |
3,400 |
| Total current assets | 105,000 |
| Total current liabilities | 65,000 |
| Net income | 15,000 |
| Dividends | 5,000 |
| Bad debt expense | 3,400 |
Auditors from Price and Company reviewed the financial records of Finley and found that a credit sale of $10,000 (for services rendered), which was included in the service revenue amount above, should not have been recognized until January 20, 2021. 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 qualified if Finley does not adjust the financial statements accordingly.
Question:
Compute the effect of the auditors’ recommended adjustment on the 2020 service revenue, accounts receivable, allowance for bad debts,
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