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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

Kelly’s Collectibles 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 83BPSB, Bad Debt Expense: Percentage of Credit Sales Method Kellys Collectibles sells nearly half its

Required:

1. Calculate the loss rate for each year from 2016 through 2019. ( Note: Round answers to three decimal places.)

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

3. CONCEPTUAL CONNECTION If credit sales for 2020 are $182,000, explain 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 Kelly’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 Kelly’s 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 45% and (b) 20% of the sales would have been lost if no credit was granted (round to nearest dollar)

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 Kelly 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 1,25,900 10,007
2017 1,02,440 8,762
2018 1,31,120 9,849
2019 1,49,780 12,303
Total 5,09,240 40,921

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 Kelly 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 45% and the sales of 20% will be lost due to no credit policy.

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