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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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Average Uncollectible Account Losses and Bad Debt Expense

The accountant for Porile Company prepared the following data for sales and losses from uncollectible accounts:

Chapter 5, Problem 65E, Average Uncollectible Account Losses and Bad Debt Expense The accountant for Porile Company prepared

Required:

1. Calculate the average percentage of losses from uncollectible accounts for 2015 through 2018.

2. Assume that the credit sales for 2019 are $1,260,000 and that the weighted average percentage calculated in Requirement 1 is used as an estimate of loses from uncollectible accounts for

2019 credit sales. Determine the bad debt expense for 2019 using the percentage of credit sales method.

3. CONCEPTUAL CONNECTION Do you believe this estimate of bad debt expense is reasonable?

4. CONCEPTUAL CONNECTION How would you estimate 2019 bad debt expense if losses from uncollectible accounts for 2018 were What other action would management consider?

To determine

(a)

Credit Sales Method:

The method named percentage of credit sales method is the method in which the bad debts are computed on the basis of percentage of sales.

Uncollectible accounts:

These are those accounts which reflect that amount of credit sales which is not to be collected i.e. bad debts.

To calculate:

The average percentage of loss rate for each year from 2015.

Explanation

The Porile Company has a glass store which sells on credit. The data of past four years showing its credit sales and losses from uncollectible accounts are as follows:

Year of Sales Credit Sales ($) Losses from Uncollectible Accounts ($)
2015 8,83,000 13,125
2016 9,52,000 14,840
2017 10,83,000 16,790
2018 11,89,000 16,850

This is given in the question.

The loss rate from uncollectible accounts for the Porile Company is as follows:

Year of Sales Credit Sales ($) Losses from Uncollectible Accounts ($)
To determine

(b)

Credit Sales Method:

The method named percentage of credit sales method is the method in which the bad debts are computed on the basis of percentage of sales.

Uncollectible accounts:

These are those accounts which reflect that amount of credit sales which is not to be collected i.e. bad debts.

To calculate:

The loss rate for estimating the bad debt for 2019 and bad debt expense for 2019.

To determine

(c)

Credit Sales Method:

The method named percentage of credit sales method is the method in which the bad debts are computed on the basis of percentage of sales.

Uncollectible accounts:

These are those accounts which reflect that amount of credit sales which is not to be collected i.e. bad debts.

The reasonability of estimate of the bad debt expense.

To determine

(d)

Credit Sales Method:

The method named percentage of credit sales method is the method in which the bad debts are computed on the basis of percentage of sales.

Uncollectible accounts:

These are those accounts which reflect that amount of credit sales which is not to be collected i.e. bad debts.

The estimation of bad debt and the reaction of the management for the bad debt of 2019, if the losses from uncollectible in 2018 were $30,000.

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