Accounts receivable changes with bad debts Clear Glass Company sells glass containers. It reported total sales of $1,580,000, with 60% of the sales on credit. It takes 60 days to collect accounts receivable. The selling price is $20 per container while the variable cost is $15 per container. The board is currently investigating a change in the collection of accounts receivable that is expected to result in a 20% increase in credit sales and a 10% increase in the average collection period. Bad debts will also increase, from 2% to 4% of sales. The firm’s opportunity cost on its investment in accounts receivable is 12%. (Note: Use a 365-day year.) Calculate bad debts in dollars for the current and proposed plans. Calculate the cost of the marginal bad debts to Clear Glass Company. Would you recommend the proposed plan? Explain. Under what circumstances would the decision to implement the proposed plan change?
Bad Debts
At the end of the accounting period, a financial statement is prepared by every company, then at that time while preparing the financial statement, the company determines among its total receivable amount how much portion of receivables is collected by the company during that accounting period.
Accounts Receivable
The word “account receivable” means the payment is yet to be made for the work that is already done. Generally, each and every business sells its goods and services either in cash or in credit. So, when the goods are sold on credit account receivable arise which means the company is going to get the payment from its customer to whom the goods are sold on credit. Usually, the credit period may be for a very short period of time and in some rare cases it takes a year.
- Calculate bad debts in dollars for the current and proposed plans.
- Calculate the cost of the marginal bad debts to Clear Glass Company.
- Would you recommend the proposed plan? Explain.
- Under what circumstances would the decision to implement the proposed plan change?
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