Question

Assume that you are preparing Galore Ltd's yearly allowance for doubtful debts based on 2% of net credit sales,

which will potentially result in 10% growth rate. The managing director, Ms Sharon Shady (Sharon), suggested you to increase the allowance for doubtful debts to 4% in order to achieve a 5% growth rate. Sharon said to you that: "we do not want our shareholders to expect our company to sustain a 10% growth every year rather, a 5% growth rate is more sustainable for our company."

Question:

Part A

1). What are the relevant factors that should be considered when estimating yearly allowance for doubtful debts?

2). How does the allowance for doubtful debts potentially impact Galore Ltd's financial reports?

Part B

1). a. Is it ethical to follow the managing director, Sharon, to estimate the allowance for doubtful debts based on a predetermined 5% growth rate?

b. Will you follow Sharon's suggestion?

2). How does your decision about whether to follow Sharon's suggestion influence various stakeholders? You are required to provide detailed explanations.