For several years, Xtreme Co's sales have been on a "cash only" basis. On January 1, 20Y4, however, Xtreme Co. began offering credit on terms of n/30. The amount of the adjusting entry to record the estimated uncollectible receivables at the end of each year has been ½ of 1% of credit sales, which is the rate reported as the average for the industry. Credit sales and the year-end credit balances in Allowance for Doubtful Accounts for the past four years are as follows: Allowance for Doubtful Accounts Credit Sales Year $ 5,000 $4,000,000 20Y4 4,400,000 20Y5 8,250 4,800,000 10,200 20Υ6 20Y7 5,100,000 14,400 (Continued) Laurie Jones, president of Xtreme Co., is concerned that the method used to account for and write off uncollectible receivables is unsatisfactory. She has asked for your ad- vice in the analysis of past operations in this area and for recommendations for change. 1. Determine the amount of (a) the addition to Allowance for Doubtful Accounts and (b) the accounts written off for each of the four years. 2. a. Advise Laurie Jones as to whether the estimate of ½ of 1% of credit sales appears reasonable. b. Assume that after discussing (a) with Laurie Jones, she asked you what action might be taken to determine what the balance of Allowance for Doubtful Accounts should be at December 31, 20Y7, and what possible changes, if any, you might recommend in accounting for uncollectible receivables. How would you respond?
For several years, Xtreme Co's sales have been on a "cash only" basis. On January 1, 20Y4, however, Xtreme Co. began offering credit on terms of n/30. The amount of the adjusting entry to record the estimated uncollectible receivables at the end of each year has been ½ of 1% of credit sales, which is the rate reported as the average for the industry. Credit sales and the year-end credit balances in Allowance for Doubtful Accounts for the past four years are as follows: Allowance for Doubtful Accounts Credit Sales Year $ 5,000 $4,000,000 20Y4 4,400,000 20Y5 8,250 4,800,000 10,200 20Υ6 20Y7 5,100,000 14,400 (Continued) Laurie Jones, president of Xtreme Co., is concerned that the method used to account for and write off uncollectible receivables is unsatisfactory. She has asked for your ad- vice in the analysis of past operations in this area and for recommendations for change. 1. Determine the amount of (a) the addition to Allowance for Doubtful Accounts and (b) the accounts written off for each of the four years. 2. a. Advise Laurie Jones as to whether the estimate of ½ of 1% of credit sales appears reasonable. b. Assume that after discussing (a) with Laurie Jones, she asked you what action might be taken to determine what the balance of Allowance for Doubtful Accounts should be at December 31, 20Y7, and what possible changes, if any, you might recommend in accounting for uncollectible receivables. How would you respond?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
Transcribed Image Text:For several years, Xtreme Co's sales have been on a "cash only" basis. On January 1, 20Y4,
however, Xtreme Co. began offering credit on terms of n/30. The amount of the adjusting
entry to record the estimated uncollectible receivables at the end of each year has been
½ of 1% of credit sales, which is the rate reported as the average for the industry. Credit
sales and the year-end credit balances in Allowance for Doubtful Accounts for the past
four years are as follows:
Allowance for
Doubtful Accounts
Credit Sales
Year
$ 5,000
$4,000,000
20Y4
4,400,000
20Y5
8,250
4,800,000
10,200
20Υ6
20Y7
5,100,000
14,400
(Continued)
Transcribed Image Text:Laurie Jones, president of Xtreme Co., is concerned that the method used to account
for and write off uncollectible receivables is unsatisfactory. She has asked for your ad-
vice in the analysis of past operations in this area and for recommendations for change.
1. Determine the amount of (a) the addition to Allowance for Doubtful Accounts and
(b) the accounts written off for each of the four years.
2. a.
Advise Laurie Jones as to whether the estimate of ½ of 1% of credit sales
appears reasonable.
b.
Assume that after discussing (a) with Laurie Jones, she asked you what action
might be taken to determine what the balance of Allowance for Doubtful Accounts
should be at December 31, 20Y7, and what possible changes, if any, you might
recommend in accounting for uncollectible receivables. How would you respond?
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