The Following Is a Partial Balance Sheet for Que Company

Essay

The following is a partial balance sheet for Que Company dated December 31, 2010:
During 2010, $4,000 of accounts receivable were written off and bad debts expense recognized on Que's 2010 net income statement was $8,000.However, the president of the company believes that $2,500 of these receivables were written off too soon.She correctly believes that there is a good chance that they will be collected next year.
The reason for her position is that Que 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 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.