Issue 4. Sunnyvale Loan Company is in the consumer loan business. Sunnyvale borrows from banks and loans out the money at higher interest rates. Sunnyvale’s bank requires Sunnyvale to submit quarterly financial statements to keep its line of credit. Sunnyvale’s main asset is Accounts Receivable. Therefore, Uncollectible-Account Expense and Allowance for Uncollectible Accounts are important accounts for the company.

Kimberly Burnham, the company’s owner, prefers that net income reflect a steady increase in a smooth pattern, rather than increase in some periods and decrease in other periods. To report smoothly increasing net income, Burnham underestimates Uncollectible-Account Expense in some periods. In other periods, Burnham overestimates the expense. She reasons that the income overstatements roughly offset the income understatements over time.

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20X7 20X6 20X5 (In thousands) Sales......... $1,475 $1,001 $902 Cost of goods sold.. 876 647 605 Gross profit......... 599 354 297 Other expenses.. 518 287 253 Net profit or (loss) before taxes...... $ 81 $ 67 $ 44. Accounts receivable............ Allowance for doubtful accounts......... $ 128 $ 107 $ 94 13 11 9