The following information was computed from the 1994 financial report of the merchandising division of Sears, Roebuck and Co. (dollars in millions). 1994 1993 1992 Merchandise sales $26,173 $23,811 $21,584 Credit sales as a percentage of total 59% 59% 57% Bad debt charge $ 650 $ 795 $ 872 Bad debt write-offs $ 869 $ 821 $ 770 REQUIRED:

a. Assume that Sears uses a percentage-of-credit-sales method to estimate bad debts. Compute the percentages used by Sears in 1992, 1993, and 1994.

b. Assume that the merchandise division of Sears began 1992 with a $200 credit balance in Allowance for Doubtful Accounts. Prepare the journal entries that affected the allowance account for 1992, 1993, and 1994, and compute the balance as of December 31, 1994.

c. Have the rates used by Sears to estimate bad debts been consistently over or under its bad debt experience? How can you tell? Would you expect Sears’ auditor to encourage the company to lower its bad debt estimate? Why or why not?