Change in Estimate versus Error Correction Facts: Your company, Plumball, provides routine and quick- response plumbing services to a range of corporate customers. Customers are expected to pay on the first of each month, in advance of receiving services. One of your customers is a private school that has been a longtime cus- tomer. The customer has not paid for the last four months of services (September-December 20X1); nevertheless, to maintain a positive relationship, your company continued to provide services during that time. Your company ceased providing services in January 20X2 and found out in that same month that the school filed for bankruptcy in August. You now believe that collection of the missed payments is extremely unlikely.
Your company has already issued financial statements to lenders (for the period ending 12/31/X1) that reflected revenue and a corresponding account receivable related to this customer of $11,000 per month for services provided to this customer. Those financial statements also reflected the company's standard allowance (reserve) amount on receivables of 3% of sales. In total, your company's average monthly sales amount to $300,000.
Required:
1. Evaluate whether receipt of this information indicates you have a change in estimate or whether the customer's bankruptcy results in this event being considered an error in previously issued financial statements.
2. Describe the accounting treatment required by the Codification for each alternative. Support your explanations with draft journal entries.
3. Briefly state which treatment appears to be more appropriate given the circumstances, describing any assump- tions you made in concluding.