Dennis Hoover has operated Every-Sport Store for five years. Three years ago, he liberalized the store's credit
Question:
Dennis Hoover has operated Every-Sport Store for five years. Three years ago, he liberalized the store's credit policy in an effort to increase credit sales. Credit sales have increased, but now Dennis is concerned with the effects of the more liberalized credit policy. Bad debts written off (the store uses the direct write-off method) have increased materially in the last three years, and now Dennis wonders if the increase justifies the substantial bad debt losses which he is certain have resulted from the more liberal credit policy.
An examination of the store's credit sales records, bad debt losses, and accounts receivable for the five years' operations reveal:
The last line in the tabulation results from reclassifying bad debt losses so that the losses appear in the same years as do the sales that resulted in the losses. Since some of the fifth-year sales had not been collected at year-end, the \(\$ 5,000\) of fifthyear losses includes \(\$ 2,845\) of estimated bad debts that are still in the accounts receivable.
Prepare a schedule showing in columns by years: income from credit sales before bad debt losses, bad debts incurred, and the resulting income from credit sales. Then, below the income figures show for each year bad debts written off as a percentage of sales followed on the next line by estimated bad debts expense incurred as a percentage of sales. Also prepare a report for Mr. Hoover in which you answer his concern about the new credit policy and recommend any changes you consider desirable in his accounting for bad debts.
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