Reference no: EM132679054

Canaday Ltd. has the following receivables balances ($M):

Gross accounts receivable $ 175

Bad-debt reserve (2)

Net accounts receivable $ 173

Two years ago a customer was approved for an unusually large credit sale of $8M over the objections of the credit and collections department. Shortly after the sale, the customer's business began to deteriorate due to an unexpected recession. To date it has paid only $2M against the order despite the fact that it has consumed all of the material purchased. The collections department has worked diligently to collect the remaining $6M without success. The customer filed for bankruptcy this morning with essentially no assets to pay a large number of creditors.

Problem 1: Evaluate the financial statement impact of the bankruptcy on Canaday. Assume Canaday's product cost is 40% of revenue and the bad-debt reserve of $2M will be fully reestablished.