The balances of selected accounts of the Simon Company on December 31, 2016, are given below:
Accounts Receivable ............................... $ 950,000
Allowance for Doubtful Accounts (credit) .......... 4,000
Total Sales ......................................... 10,050,000
Sales Returns and Allowances (total) ............. 250,000
(Credit sales were $8,600,000. Returns and allowances on these sales were $210,000.)
Instructions
1. Compute the amount to be charged to Uncollectible Accounts Expense under each of the following different assumptions:
a. Uncollectible accounts are estimated to be 0.2 percent of net credit sales.
b. Experience has shown that about 3.2 percent of the accounts receivable will prove worthless.
2. Suppose Allowance for Doubtful Accounts has a debit balance of $3,500 instead of a credit balance of $4,000, but all other account balances remain the same. Compute the amount to be charged to Uncollectible Accounts Expense under each assumption in item 1.
Analyze: If you were the owner of Simon Company and wished to maximize profits reported for 2016, which method would you prefer to use?