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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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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:

Chapter 5, Problem 83APSA, Bad Debt Expense: Percentage of Credit Sales Method The Glass House, a glass and china store, sells

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.

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 loss rate for each year from 2016.

Explanation

The Glass House 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 ($) Losses from Uncollectible Accounts ($)
2016 1,97,000 12,608
2017 2,02,000 13,299
2018 2,12,000 13,285
2019 2,73,000 22,274
Total 8,84,000 61,466

This is given in the question

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 significant change in the loss rate.

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.

To calculate:

The loss rate for estimating the bad debt for 2020.

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.

To calculate:

The bad debt expense for 2020 and the journal entry for recording the same.

To determine

(e)

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 reason for adopting more lenient credit terms by the Glass House and its effect on the bad debt expense.

To determine

(f)

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 increase in the operating income over those 4 years assuming gross profit is 25% and the sales of 50% will be lost due to no credit policy.

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