Textbook Problem

Bad Debt Expense: Percentage of Credit Sales Method

The Glass House, a glass and china store, sells nearly half its merchandise on credit. During the past 4 years, the following data were developed for credit sales and losses from uncollectible accounts:

Required:

1. Calculate the loss rate for each year from 2016 through 2018. ( Note: Round answers to three decimal places.)

2. Determine whether there appears to be a significant change in the loss rate over time.

3. CONCEPTUAL CONNECTION If credit sales for 2020 are $400,000, determine what loss rate you would recommend to estimate bad debts. ( Note: Round answers to three decimal places.)

4. Using the rate you recommend, record bad debt expense for 2020.

5. CONCEPTUAL CONNECTION Assume that the increase in The Glass House’s sales in

2020 was largely due to granting credit to customers who would have been denied credit in previous years. How would this change your answer to Requirement 4? Describe a legitimate business reason why The Glass House would adopt more lenient credit terms.

6. CONCEPTUAL CONNECTION Using the data from 2016 through 2019, estimate the increase in income from operations in total for those 4 years assuming (a) the average gross margin is 25% and (b) 50% of the sales would have been lost if no credit was granted.