Integrating Case 7-7 Change in estimate of bad debts CLO7-5 McLaughlin Corporation uses the allowance method to account for bad debts. At the end of the company's fiscal year, accounts receivable are analyzed and the allowance for uncollectible accounts is adjusted. At the end of 2021, the company reported the following amounts: Accounts receivable $ 10,850,000 Less: Allowance for uncollectible accounts (450,000) Accounts receivable, net $ 10,400,000 In 2022, it was determined that $1,825,000 of year-end 2021 receivables had to be written off as uncollectible. This was due in part Page 398 to the fact that Hughes Corporation, a long-standing customer that had always paid its bills, unexpectedly declared bankruptcy in 2022. Hughes owed McLaughlin $1,400,000. At the end of 2021, none of the Hughes receivable was considered uncollectible. Required: Should McLaughlin's underestimation of bad debts be treated as an error correction (requiring retroactive restatement) or a change in estimate (and accounted for prospectively)? Describe the appropriate accounting treatment and required disclosures in the financial statements issued for the 2021 fiscal year.
Integrating Case 7-7 Change in estimate of bad debts CLO7-5 McLaughlin Corporation uses the allowance method to account for bad debts. At the end of the company's fiscal year, accounts receivable are analyzed and the allowance for uncollectible accounts is adjusted. At the end of 2021, the company reported the following amounts: Accounts receivable $ 10,850,000 Less: Allowance for uncollectible accounts (450,000) Accounts receivable, net $ 10,400,000 In 2022, it was determined that $1,825,000 of year-end 2021 receivables had to be written off as uncollectible. This was due in part Page 398 to the fact that Hughes Corporation, a long-standing customer that had always paid its bills, unexpectedly declared bankruptcy in 2022. Hughes owed McLaughlin $1,400,000. At the end of 2021, none of the Hughes receivable was considered uncollectible. Required: Should McLaughlin's underestimation of bad debts be treated as an error correction (requiring retroactive restatement) or a change in estimate (and accounted for prospectively)? Describe the appropriate accounting treatment and required disclosures in the financial statements issued for the 2021 fiscal year.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
What is the error correction (requiring retroactive restatement)?
Transcribed Image Text:Integrating Case 7–7 Change in estimate of bad debts
LO7-5
McLaughlin Corporation uses the allowance method to account for bad debts. At the end of the company's fiscal year, accounts receivable are
analyzed and the allowance for uncollectible accounts is adjusted. At the end of 2021, the company reported the following amounts:
Accounts receivable
$ 10,850,000
Less: Allowance for uncollectible accounts
(450,000)
Accounts receivable, net
$ 10,400,000
In 2022, it was determined that $1,825,000 of year-end 2021 receivables had to be written off as uncollectible. This was due in part
Page 398
to the fact that Hughes Corporation, a long-standing customer that had always paid its bills, unexpectedly declared bankruptcy in 2022.
Hughes owed McLaughlin $1,400,000. At the end of 2021, none of the Hughes receivable was considered uncollectible.
Required:
Should McLaughlin's underestimation of bad debts be treated as an error correction (requiring retroactive restatement) or a change in estimate
(and accounted for prospectively)? Describe the appropriate accounting treatment and required disclosures in the financial statements issued
for the 2021 fiscal year.
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