The Following Is a Partial Balance Sheet for Quenton Company

question 21

Essay

The following is a partial balance sheet for Quenton Company dated December 31, 2017:
$$\begin{array}{l} \underline {\text { Current assets }}\\\begin{array} { l r r } \text { Cash } & & \$ 20,000 \\\text { Accounts receivable } &\$45,000 & \\\text { Allowance for doubtful accounts } & ( 3,000 ) & \\\text { Net realizable value } & & \$ 42,000 \\\text { Irventary } & & \underline { \$ 33,000 } \\\text { Tatal current assets } && \underline { \$ 95,000} \\\text { Current liabilities } && \underline { \$ 65,000}\end{array}\end{array}$$
During 2017, $4,000 of accounts receivable were written off as uncollectible and bad debt expense (based on an aging schedule) recognized on Quenton's 2017 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.

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Definitions:

Proprietary Communications Network

A communication system designed and used by a single organization or entity, often closed to external access.

Repeaters

Electronic devices that receive a signal and retransmit it at a higher level or higher power, or onto the other side of an obstruction, to ensure the signal can cover longer distances without degradation.

Midstream

In the oil and gas industry, refers to the transportation, storage, and wholesale marketing of crude or refined petroleum products.

Reamplify

The process of amplifying a signal again, usually to restore its strength after it has been weakened or degraded.