Reference no: EM13496171

Bad debts

Rachael shock, assistant accountant for Bunbury Instruments Ltd, was finalising the balance sheet of the company as at 30 june 2013 with the accountant of the business, Olle Twist. Although both agreed that everything appeared to be in order , Rachael had notice that a large loan had been taken out by the company with Bunbury Bank and that as part of the loan agreement, Bunbury instrument ltd was to maintain a ratio of current assets(less inventories) to current liabilities of a least 1.25:1. She was concerned that the company would not be able to maintain this ratio given the fact that she had just learned that two of the companys largest customers had gone into liquidation and there was every likelihood that the company would recover no more than 10% of the debts owing. The current allowance for doubtful debts was grossly inadequate and thus the accounts receivable was overstated.

The relevant figures prepared for the balance sheet showed current assets(less inventories) standing at $1250000 and current liabilities stand at $1 000 000. Rachael raised her concerns with olle Twist about the overstatemet of account receivable and not being able to maintain the desired minimum ratio for the purpose of the loan agreemet, if the account receivable figure was updated. Olle replied: Yes, I can appreciate your concerns. However, we don't know how much will be recovered from the liquidated companies, so lets leave things the way they are. The bank wants only the 30 june figures an as it is, the ratio will be okay as far as the bank is concerned. Olle thought about the problem a little further and then explained: "we wont have to write off the additional bad debts until next year when they occur and are known with certainly, and by then things will have picked up. I am sure the directors of the company will agree with me and happy to leave the accounts as they are, so there is no need for you to worry any more."

REQUIRED

Identify the stakeholders involved in this situation