Bad Debt Expense: Percentage of Credit Sales Method}

Kelly's Collectibles sells nearly half its merchandise on credit. During the past four years, the following data were developed for credit sales and losses from uncollectible accounts:

Required:
1. Calculate the loss rate for each year from 2015 through 2018. (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 2019 are \(\$ 415,000\), 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 2019 .
5. CONCEPTUAL CONNECTION Assume that the increase in Kelly's sales in 2019 was largely due to granting credit to customers who would have been denied credit in previous years. How would this change your answer to part 4? Describe a legitimate business reason why Kelly's would adopt more lenient credit terms.
6. Use the data from 2015 to 2018 and assume that \(20 \%\) of the sales would have been lost if no credit has been granted and assume that the average gross margin is \(40 \%\). Calculate how much extra income was realized over the 4 years in total because the store did indeed allow credit sales.
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Losses from Year of Sales Credit Sales Uncollectible Accounts* 2015 2016 $205,000 $15.527 185,000 11,692 2017 209,000 14,184 2018 253,000 21.933 Total $852,000 $63,336