The following is a partial balance sheet for Quenton Company dated December 31, 2010:
During 2010, $4,000 of accounts receivable were written off as uncollectible and bad debts expense recognized on Quenton's 2010 net income statement was $8,000. However, the president of the company believes that $2,500 of these receivables were written off too soon. She believes that there is a good chance that they will be collected next year. There is some historical evidence to back the president's position.
A partial explanation for her position is that Quenton has a debt covenant requiring it to maintain a current ratio of 1.5. The president believes that by reversing the write-off of $2,500 of accounts receivable, the current assets will be $97,500 and the current ratio will be 1.5. However, the chief financial officer states that a better approach to getting the current ratio to 1.5 is to pay off some accounts payable. If the company paid $5,000 of accounts payable, the current ratio would become the minimum 1.5 required by the debt covenant.
Comment, with numerical illustration, on the president's and chief financial officer's positions.

Question

The following is a partial balance sheet for Quenton Company dated December 31, 2010:
  During 2010, $4,000 of accounts receivable were written off as uncollectible and bad debts expense recognized on Quenton's 2010 net income statement was $8,000. However, the president of the company believes that $2,500 of these receivables were written off too soon. She believes that there is a good chance that they will be collected next year. There is some historical evidence to back the president's position.
A partial explanation for her position is that Quenton has a debt covenant requiring it to maintain a current ratio of 1.5. The president believes that by reversing the write-off of $2,500 of accounts receivable, the current assets will be $97,500 and the current ratio will be 1.5. However, the chief financial officer states that a better approach to getting the current ratio to 1.5 is to pay off some accounts payable. If the company paid $5,000 of accounts payable, the current ratio would become the minimum 1.5 required by the debt covenant.
Comment, with numerical illustration, on the president's and chief financial officer's positions.

Quizplus · Accepted Answer

The Answer of The following is a partial balance sheet for Quenton Company dated December 31, 2010:
  During 2010, $4,000 of accounts receivable were written off as uncollectible and bad debts expense recognized on Quenton's 2010 net income statement was $8,000. However, the president of the company believes that $2,500 of these receivables were written off too soon. She believes that there is a good chance that they will be collected next year. There is some historical evidence to back the president's position.
A partial explanation for her position is that Quenton has a debt covenant requiring it to maintain a current ratio of 1.5. The president believes that by reversing the write-off of $2,500 of accounts receivable, the current assets will be $97,500 and the current ratio will be 1.5. However, the chief financial officer states that a better approach to getting the current ratio to 1.5 is to pay off some accounts payable. If the company paid $5,000 of accounts payable, the current ratio would become the minimum 1.5 required by the debt covenant.
Comment, with numerical illustration, on the president's and chief financial officer's positions.

The Following Is a Partial Balance Sheet for Quenton Company