Reference no: EM132743615

You are a CPA at Destiny Tech ("Destiny"). Destiny provides computer and network maintenance services to a range of corporate customers. Customers are expected to pay on the first of each month, in advance of receiving services. One of your customers, Mango Paper Company, has been a longtime customer. However, Mango has not paid for the last four months of services (SeptemberDecember 20Xl); nevertheless, to maintain a positive relationship, Destiny continued to provide services during that time. Destiny ceased providing services in January 20X2 and found out in that same month that the Mango Paper Company filed for bankruptcy in August. You now believe that collection of the missed payments is extremely unlikely. Destiny has already issued financial statements to lenders (for the period ending 12/31/Xl) that reflected revenue and a corresponding account receivable related to Mango for $14,000 per month for services provided. Those financial statements also reflected Destiny' s standard allowance (reserve) amount on receivables of 3% of sales. In total, your company's average monthly sales amount to $300,000. Destiny Tech's CFO has asked you to research the proper accounting treatment for this situation.

Required:

Problem a. Evaluate whether receipt of this information indicates you have a change in estimate or whether the customer's bankruptcy results in this event being considered an error in previously issued financial statements.

Problem b. Describe the accounting treatment required by the Codification for each alternative. Support your explanations with draft journal entries.

Problem c. Briefly state which treatment appears to be more appropriate (your recommendation) given the circumstances. Be sure to describe any assumptions you made in reaching this conclusion.