Preston Enterprises uses the direct write-off method of accounting for uncollectible accounts. On October 12, a very large account was written off. The amount was subsequently recovered on December 15. Ray Preston, the owner of the company, instructed the accountant to not make a journal entry for the recovery and to hold the check in his desk until after the first of the year “for tax purposes.”
1. If you were the accountant, what would you think of Preston’s request?
2. If the December 15 entry is not made, how will it affect Preston’s current year financial statements?
3. Assume the amount of the charge-off and the subsequent recovery was $10,000. Prepare the proper journal entries for October 12 and December 15.