For several years, Xtreme Co.'s sales have been on a "cash only" basis. On January 1, 20Y4, however, Xtreme Co. began offering credit on terms of n/30. The amount of the adjusting entry to record the estimated uncollectible receivables at the end of each year has been ½ of 1% of credit sales, which is the rate reported as the average for the industry. Credit sales and the year-end credit balances in Allowance for Doubtful Accounts for the past four years are as follows:
Year Credit Sales Allowance for Doubtful Accounts
20Y4..............$4,000,000..............................................$ 5,000
20Y5...............4,400,000................................................8,250
20Y6...............4,800,000...............................................10,200
20Y7...............5,100,000...............................................14,400
Laurie Jones, president of Xtreme Co., is concerned that the method used to account for and write off uncollectible receivables is unsatisfactory. She has asked for your advice in the analysis of past operations in this area and for recommendations for change.
1. Determine the amount of
(a) The addition to Allowance for Doubtful Accounts
(b) The accounts written off for each of the four years.
2. a. Advise Laurie Jones as to whether the estimate of ½ of 1% of credit sales appears reasonable.
b. Assume that after discussing (a) with Laurie Jones, she asked you what action might be taken to determine what the balance of Allowance for Doubtful Accounts should be at December 31, 20Y7, and what possible changes, if any, you might recommend in accounting for uncollectible receivables. How would you respond?