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
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.
(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
Answer to Problem 83APSA
The loss Rate over the period is:
Loss Rate Percentage | |
Explanation of Solution
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:
Credit Sales |
Losses from Uncollectible Accounts |
|
Total |
This is given in the question.
The loss rate from uncollectible accounts for the Glass House is as follows:
Credit Sales |
Losses from Uncollectible Accounts |
Loss Rate Percentage |
|
Total |
(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.
Answer to Problem 83APSA
The significant change is observed in the year
Explanation of Solution
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:
Credit Sales |
Losses from Uncollectible Accounts |
|
This is given in the question.
The changes in the loss rates over the period for the Glass House are as follows:
Loss Rate Percentage | Increase or Decrease in the Loss Rate over the period | ||
NOTE: The Base Year in this is taken to be |
(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
Answer to Problem 83APSA
The loss rate for estimating the bad debt in the year
Explanation of Solution
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:
Credit Sales |
Losses from Uncollectible Accounts |
|
This is given in the question.
The loss rate for estimating the bad debt in the year
Credit Sales |
Losses from Uncollectible Accounts |
Loss Rate Percentage | Probability of Loss | Weighted Average of Loss | |
Total |
(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
Answer to Problem 83APSA
The bad debt expense for
Explanation of Solution
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:
Credit Sales |
Losses from Uncollectible Accounts |
|
This is given in the question.
The credit sales given in the question is
So, the bad debt expense to be recognised:
The journal entry for the Glass House is as follows:
Date | Particulars | Debit ($) | Credit ($) |
Bad debt expense……… Allowance for Doubtful accounts.………(Record the entry of bad debt expense) |
(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.
Answer to Problem 83APSA
The reasonable business reason for adopting the more lenient credit terms is that the business will increase their sales and revenue through this behaviour. The effect on bad debt will be that the bad debt will increase from this leniency.
Explanation of Solution
The leniency in the credit terms by the Glass House will increase the bad debt from
(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
Answer to Problem 83APSA
The incremental in the operating income is
Explanation of Solution
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:
Credit Sales |
Losses from Uncollectible Accounts |
|
This is given in the question.
The increase in the income of the operations for the Glass House is as follows:
Credit Sales |
Gross Profit |
Losses from Uncollectible Accounts |
Increase in Operation Income |
||
Total |
Thus, the increase in the operation income is
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Chapter 5 Solutions
Cornerstones of Financial Accounting
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