CASE WEEK 7 WORKING CAPITAL Ch 8 Cases SCHROEDER TEXT for ACCT 632Modified Cases 8-4 & 8-9 : Valuing Accounts Receivable using the Bad Debt AllowanceThe theoretical valuation of receivables could be the present value of expected futurecash flows. However, trade receivables are not discounted owing to materiality and currenttiming, so the net realizable value is the practical approximation for the theoretical valuation.For an example, consider the publicly-traded Anth Company. Anth has significant tradereceivables levels, running about $200 million net receivables last year for annual sales of $600million. Some specific accounts were written off as uncollectible, about $20 million, while someprevious write-offâs of $10 million were collected. Anth applies the allowance approach with atypical balance of about $15 million.Required: Prepare a brief report in good essay form, about 300 to 400 words, explaining theappropriate handling of these issues. Where alternatives are available, discuss the options and thebasis for their selection. Cite the Code (ASC) section(s) that apply. Diction and grammar will beconsidered.a) Define the net realizable value as the concept or construct applies to the trade receivables.b) Address the approaches to calculating or determining the allowance for bad debt,considering the advantages and disadvantages of the balance sheet method versus theincome statement approach. Your discussion should include:a. The approach providing the best measure of liquidity and why it is.b. The approach most closely delivering a net realizable value, already highlightedas the most practical method for proper valuation. Why is it?c. The approach most consistent with the matching principle and why it is.d. The approach that seems more consistent with the OCI (Other ComprehensiveIncome) approach to accounting for income and why it is so.c) How should Anth handle the bad debts allowance and highlighted events?a. How often should Anth update the allowance this year and why? Sales rose 5%this year, to $630 million, and Receivables are up 10% to $220 million.b. What trigger events should signal Anth to recalculate and adjust the allowance?Calculate and discuss metrics that reflect the trend of current vs. prior year usingthe ending balances of Receivables (so ignoring year over year averages).c. Prepare the journal entries for recordingi. The new write-offâs, andii. The old write-offâs now collected.iii. The current year allowance for bad debts. ISSUED BY JEF GARNER, ACCOUNTING INSTRUCTOR updated 2/25/2016 pg. 1
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