BYP9-1 RLF Company sells offi ce equipment and supplies to many organizations in the city and surrounding area on contract terms of 2/10, n/30. In the past, over 75% of the credit customers have taken

advantage of the discount by paying within 10 days of the invoice date.

The number of customers taking the full 30 days to pay has increased within the last year. Current indications are that less than 60% of the customers are now taking the discount. Bad debts as a percentage

of gross credit sales have risen from the 2.5% provided in past years to about 4.5% in the current year.

The company's Finance Committee has requested more information on the collections of accounts

receivable. The controller responded to this request with the report reproduced below.

RLF COMPANY

Accounts Receivable Collections

May 31, 2017

The fact that some credit accounts will prove uncollectible is normal. Annual bad debt write-offs

have been 2.5% of gross credit sales over the past 5 years. During the last fi scal year, this percentage

increased to slightly less than 4.5%. The current Accounts Receivable balance is $1,400,000. The condition of this balance in terms of age and probability of collection is as follows.

Proportion of Total

60%

22%

9%

5%

21/2%

11/2% Age Categories

not yet due

less than 30 days past due

30 to 60 days past due

61 to 120 days past due

121 to 180 days past due

over 180 days past due Probability of Collection

98%

96%

94%

91%

75%

30%Allowance for Doubtful Accounts had a credit balance of $29,500 on June 1, 2016. RLF has provided

for a monthly bad debt expense accrual during the current fi scal year based on the assumption that

4.5% of gross credit sales will be uncollectible. Total gross credit sales for the 2016-2017 fiscal year

amounted to $2,900,000. Write-offs of bad accounts during the year totaled $102,000.

Instructions

(a) Prepare an accounts receivable aging schedule for RLF Company using the age categories identifi ed in the controller's report to the Finance Committee showing the following.

(1) The amount of accounts receivable outstanding for each age category and in total.

(2) The estimated amount that is uncollectible for each category and in total.

(b) Compute the amount of the year-end adjustment necessary to bring Allowance for Doubtful

Accounts to the balance indicated by the age analysis. Then prepare the necessary journal entry to

adjust the accounting records.

(c) In a recessionary environment with tight credit and high interest rates:

(1) Identify steps RLF Company might consider to improve the accounts receivable situation.

(2) Then evaluate each step identifi ed in terms of the risks and costs involved.