Bad Debt Expense Memo
Subject: Bad Debt Expense Memo Introduction
Your company has three uncollectible accounts which from three new customers: University of Hare-Brain, Dim-State University, and the College of Silly, each of them owned amount of $5,000 when they filed for bankruptcy. You decide whether to write the total $15,000 account payable off as a bad debt expense and report an operating loss, or just report these losses as extraordinary event and this method allow you to report $7,500 operating profit instead of report operating loss. Because you have to present your first year operating statement to a multi-national search company in order to sell your SEC filling search business, the decision you made will be really important for you under this circumstance. So the purpose for me to write this memo is to help my client, Dr Kealey to classify the uncollectable accounts and how to report these losses on the financial statement.
Solution
Based on my investigation, I will support Dr. Kealey to report these losses as bad debt expense instead of extraordinary losses on the financial statement. Because extraordinary loss is an unusual or infrequency loss resulting from an exceptional cause- which is the “natural” transaction of the account and it will not be collectable in the future. According to the FASB codification-225-20-45, extraordinary events or transaction are not reasonably expected to recur in the foreseeable future in considered to occur infrequently. So the losses from the default by the customers are not qualified as the extraordinary item. Also presenting the losses as the extraordinary event will represent the unfaithful attitude to the external users. Because it is natural for the company who has the bad debt expense during the operation, it’s unnecessary to hide any losses in order to demonstrate the
Your company has three uncollectible accounts which from three new customers: University of Hare-Brain, Dim-State University, and the College of Silly, each of them owned amount of $5,000 when they filed for bankruptcy. You decide whether to write the total $15,000 account payable off as a bad debt expense and report an operating loss, or just report these losses as extraordinary event and this method allow you to report $7,500 operating profit instead of report operating loss. Because you have to present your first year operating statement to a multi-national search company in order to sell your SEC filling search business, the decision you made will be really important for you under this circumstance. So the purpose for me to write this memo is to help my client, Dr Kealey to classify the uncollectable accounts and how to report these losses on the financial statement.
Solution
Based on my investigation, I will support Dr. Kealey to report these losses as bad debt expense instead of extraordinary losses on the financial statement. Because extraordinary loss is an unusual or infrequency loss resulting from an exceptional cause- which is the “natural” transaction of the account and it will not be collectable in the future. According to the FASB codification-225-20-45, extraordinary events or transaction are not reasonably expected to recur in the foreseeable future in considered to occur infrequently. So the losses from the default by the customers are not qualified as the extraordinary item. Also presenting the losses as the extraordinary event will represent the unfaithful attitude to the external users. Because it is natural for the company who has the bad debt expense during the operation, it’s unnecessary to hide any losses in order to demonstrate the
References: “The Critical Nature of Neutral Financial Reporting” By Rebecca Todd McEnally, CFA, and Patricia Doran Walters, CFA, Article from FASB Report, August 29, 2003 http://www.fasb.org/cs/BlobServer?blobkey=id&blobwhere=1175818765436&blobheader=application%2Fpdf&blobcol=urldata&blobtable=MungoBlobs “General Accepted Accounting Principles or GAAP: What does it mean?” By Stephanie Paul - Sep 2008.Web http://www.legalzoom.com/business-management/running-your-business/general-accepted-accounting-principles-or