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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