Integrating Case :Change in estimate of bad debts
McLaughlin Corporation uses the allowance method to account for bad debts. At the end of the company's fiscal year, accounts receivable are analyzed and the allowance for uncollectible accounts is adjusted. At the end of 2016, the company reported the following amounts:
|
Accounts receivable
|
$10,850,000
|
|
Less: Allowance for uncollectible accounts
|
(450,000)
|
|
Accounts receivable, net
|
$10,400,000
|
In 2017, it was determined that $1,825,000 of year-end 2016 receivables had to be written off as uncollectible. This was due in part to the fact that Hughes Corporation, a long-standing customer that had always paid its bills, unexpectedly declared bankruptcy in 2017. Hughes owed McLaughlin $1,400,000. At the end of 2016, none of the Hughes receivable was considered uncollectible.
Required:
Describe the appropriate accounting treatment and required disclosures for McLaughlin's underestimation of bad debts at the end of 2016.