For several years, Xtreme Co's sales have been on a "cash only" basis. On January 1, 20Y4,however, Xtreme Co. began offering credit on terms of n/30. The amount of the adjustingentry to record the estimated uncollectible receivables at the end of each year has been½ of 1% of credit sales, which is the rate reported as the average for the industry. Creditsales and the year-end credit balances in Allowance for Doubtful Accounts for the pastfour years are as follows:Allowance forDoubtful AccountsCredit SalesYear$ 5,000$4,000,00020Y44,400,00020Y58,2504,800,00010,20020Υ620Y75,100,00014,400(Continued) Laurie Jones, president of Xtreme Co., is concerned that the method used to accountfor and write off uncollectible receivables is unsatisfactory. She has asked for your ad-vice in the analysis of past operations in this area and for recommendations for change.1. Determine the amount of (a) the addition to Allowance for Doubtful Accounts and(b) the accounts written off for each of the four years.2. a.Advise Laurie Jones as to whether the estimate of ½ of 1% of credit salesappears reasonable.b.Assume that after discussing (a) with Laurie Jones, she asked you what actionmight be taken to determine what the balance of Allowance for Doubtful Accountsshould be at December 31, 20Y7, and what possible changes, if any, you mightrecommend in accounting for uncollectible receivables. How would you respond?

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Asked Dec 17, 2019
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For several years, Xtreme Co's sales have been on a "cash only" basis. On January 1, 20Y4,
however, Xtreme Co. began offering credit on terms of n/30. The amount of the adjusting
entry to record the estimated uncollectible receivables at the end of each year has been
½ of 1% of credit sales, which is the rate reported as the average for the industry. Credit
sales and the year-end credit balances in Allowance for Doubtful Accounts for the past
four years are as follows:
Allowance for
Doubtful Accounts
Credit Sales
Year
$ 5,000
$4,000,000
20Y4
4,400,000
20Y5
8,250
4,800,000
10,200
20Υ6
20Y7
5,100,000
14,400
(Continued)
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For several years, Xtreme Co's sales have been on a "cash only" basis. On January 1, 20Y4, however, Xtreme Co. began offering credit on terms of n/30. The amount of the adjusting entry to record the estimated uncollectible receivables at the end of each year has been ½ of 1% of credit sales, which is the rate reported as the average for the industry. Credit sales and the year-end credit balances in Allowance for Doubtful Accounts for the past four years are as follows: Allowance for Doubtful Accounts Credit Sales Year $ 5,000 $4,000,000 20Y4 4,400,000 20Y5 8,250 4,800,000 10,200 20Υ6 20Y7 5,100,000 14,400 (Continued)

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Laurie Jones, president of Xtreme Co., is concerned that the method used to account
for and write off uncollectible receivables is unsatisfactory. She has asked for your ad-
vice in the analysis of past operations in this area and for recommendations for change.
1. Determine the amount of (a) the addition to Allowance for Doubtful Accounts and
(b) the accounts written off for each of the four years.
2. a.
Advise Laurie Jones as to whether the estimate of ½ of 1% of credit sales
appears reasonable.
b.
Assume that after discussing (a) with Laurie Jones, she asked you what action
might be taken to determine what the balance of Allowance for Doubtful Accounts
should be at December 31, 20Y7, and what possible changes, if any, you might
recommend in accounting for uncollectible receivables. How would you respond?
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Laurie Jones, president of Xtreme Co., is concerned that the method used to account for and write off uncollectible receivables is unsatisfactory. She has asked for your ad- vice in the analysis of past operations in this area and for recommendations for change. 1. Determine the amount of (a) the addition to Allowance for Doubtful Accounts and (b) the accounts written off for each of the four years. 2. a. Advise Laurie Jones as to whether the estimate of ½ of 1% of credit sales appears reasonable. b. Assume that after discussing (a) with Laurie Jones, she asked you what action might be taken to determine what the balance of Allowance for Doubtful Accounts should be at December 31, 20Y7, and what possible changes, if any, you might recommend in accounting for uncollectible receivables. How would you respond?

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Expert Answer

Step 1

1)

 

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a) Determine the amount of addition to allowance for doubtful accounts. Addition to allowance for doubtful accounts Year $4, 000,000 xx1% 20Υ4 S20,000 $4,400,000×-x1% | 20Y5 $22,000 | $4, 800, 000 x×1% 20Υ6 $24,000 1 $5,100, 000 xx1% 20Υ7 $14,400 Hence, the amount of addition to allowance for doubtful accounts in 20Y4, 20Y5, 20Y6, 20Y7 is $20,000, $22,000, $24,000, and $14,400 respectively.

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Step 2
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b) Determine the amount of accounts written off in year 20Y4. [Addition to allowance for doubtful accounts Amount of accounts written off in year 20Y4| Credit balance at the end of year 20Y4 = $20,000 – $5,000 = $15,000 Determine the amount of accounts written off in year 20Y5. [Credit balance at the beginning of year 20Y5+ = Addition to allowance for doubtful accounts Credit balance at the end of year 20Y5 = $5,000+ $22, 000 – $8, 250 Amount of accounts written off in year 20Y5 = $18, 750 Determine the amount of accounts written off in year 20Y6. [Credit balance at the beginning of year 20Y6+ Amount of accounts Addition to allowance for doubtful accounts written off in year 20Y6J Credit balance at the end of year 20Y6 = $8,250+$24,000-S10,200 = $22,050 Determine the amount of accounts written off in year 20Y7. [Credit balance at the beginning of year 20Y7+ Amount of accounts = Addition to allowance for doubtful accounts written off in year 20Y7| Credit balance at the end of year 20Y7 = $10, 200 +$25, 500-S14, 400 = $21,300 Hence, the amount of accounts written off in 20Y4, 20Y5, 20Y6, 20Y7 is $15,000, S18,750, $22,050, and $21,300 respectively.

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