Problem 5-83A Bad Debt Expense: Percentage of Credit Sales Method

The Glass House, a glass and china store, sells nearly half its merchandise on credit. During the past 4 years, the following data were developed for credit sales and losses from uncollectible accounts: (Only need help with question 5)

Year of Sales	Credit Sales			Losses from Uncollectible Accounts*
2016		$197,000			$12,608
2017		202,000			13,299
2018		212,000			13,285
2019		273,000			22,274
Total		$884,000			$61,466

* Losses from uncollectible accounts are the actual losses related to sales of that year (rather than write-offs of that year).

Required:

1. Calculate the loss rate for each year from 2016 through 2019. Round your answers to three decimal places.

Year	Loss Rate
2016
2017
2018
2019

2. Is there a significant change in the loss rate over time? Yes

3. Conceptual Connection: The weighted average for the 4 years (rounded to three decimals) is ----

If credit sales for 2020 are $400,000, what rate would you recommend to estimate bad debts? A rate closer to --- would be more conservative.

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1 & 2. Use the data from prior years to calculate losses from uncollectible accounts as a percentage of credit sales. Consider how the loss rate has changed over the years.

4. If credit sales for 2020 are $400,000 and using the rate you recommended above, record bad debt expense for 2020.

	Bad Debt Expense
	Allowance for Doubtful Accounts
	Record adjusting entry for bad debt expense estimate

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4. Make the best estimate of bad debt expense you can.

5. Conceptual Connection: Using the data from 2016 through 2019, estimate the change in income from operations in total for those 4 years assuming (a) the average gross margin is 25% and (b) 50% of the sales would have been lost if no credit was granted.

Increase in gross margin	$?
Increase in income from operations	$?