= The Midler Boutique has significantly expanded its sales in recent years by offering a lib- eral credit policy. As a result, bad debt losses have also increased. The owner has pre- pared the following summarized income statements:

ee en noses ee eer 1997 1998 1999 2000 ee Sales on credit $32,000 $50,000 $70,000 $90,000 Cost of goods sold (12,000) (19,000) (26,000) (33,000) Bad debt expense (1,302) (2,250) (3,260) (4,320) Other expenses (10,000) (12,000) (14,000) (16,000) Net Income $ 8,698 $16,750 $26,740 $36,680 Accounts written off $ 200 $ 1,000 $ 1,600 $ 2,000 The company uses the percentage of sales method to calculate its bad debts expense. The accounts written off each year relate to credit sales made in the previous year.

Required: Prepare for Ms. Midler a report that explains the trend in bad debts as compared with other items on the income statement. Does it appear that the liberal credit policy is successful? What do you think the bad debts expense for 2001 should be if credit sales were $120,000 that year? TYK-1