Since 2011 Kyuquot Inc. (Kyuquot) has estimated that its bad debt expense would be approximately 2 percent of credit sales each year. During 2012 a number of changes took place in the company’s finance department that significantly reduced the effectiveness of its internal controls over credit granting and receivables collection. As a result, in 2013 uncollectibles increased to about 3 percent of credit sales. However, the accounting department never bothered to increase the 2 percent rate that had been implemented in 2021.

The following information is also available about Kyuquot’s receivables and bad debts:
i. Kyuquot’s year-end is December 31.
i. The balance in Kyuquot’s allowance account on January 1, 2011, was $40,000.
iii. Credit sales and writeoffs by year and accounts receivable on December 31 of each year were:

Required:

a. Calculate the bad debt expense Kyuquot’s accounting department would have made in each year from 2011 through 2016.

b. Calculate the balance in allowance for uncollectible accounts on December 31 of each year, after the adjusting entry recording the bad debt expense for the year recorded.

c. Examine the balance in the allowance account over the period from 2011 through 2016. Explain what is happening to the allowance account as a result of using a percentage of credit sales that is consistently too high. (To answer it may help to look at the balance in the allowance account as a percentage of accounts receivable.)

d. What is the effect on income each year of using a percentage of credit sales that is consistently too small? Explain.

e. What is the net amount of accounts receivable (accounts receivable — allowance for uncollectibles) on Kyuquot’s balance sheet on December 31, 2016? Does the amount on the balance sheet represent the net realizable value of the accounts receivable on December 31, 2016? Explain.

f. What would the balance in the allowance account be on December 31, 2016 after the adjusting entry for bad debts is made if Kyuquot expensed 3 percent of credit sales as bad debts beginning in 2013?
g. Suppose that in 2016 management become aware of the error it was making estimating bad debts each year by using 2 percent of credit sales instead of 3 percent.
What journal entry would Kyuquot have to make to reduce the balance in the allowance account to the amount calculated in (f)? What would be the effect of this journal entry on net income in 2016? What are some of the implications of these errors on users of the financial statements?

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Credit sales made Year during the year Writeoffs during the year Accounts receivable on December 31* 2011 $1,500,000 $39,000 $526,000 2012 1,650,000 45,100 562,000 2013 1,860,000 35,750 614,000 2014 2,100,000 32,896 672,000 2015 2,390,000 45,998 752,000 2016 2,600,000 47,800 806,000 *Accounts receivable is the gross amount, before deducting the allowance for doubtful accounts.