Chapter 5, Problem 65E

Average Uncollectible Account Losses and Bad Debt Expense

The accountant for Porile Company prepared the following data for sales and losses from uncollectible accounts:

Required:

1. Calculate the average percentage of losses from uncollectible accounts for 2015 through 2018.

2. Assume that the credit sales for 2019 are $1,260,000 and that the weighted average percentage calculated in Requirement 1 is used as an estimate of loses from uncollectible accounts for

2019 credit sales. Determine the bad debt expense for 2019 using the percentage of credit sales method.

3. CONCEPTUAL CONNECTION Do you believe this estimate of bad debt expense is reasonable?

4. CONCEPTUAL CONNECTION How would you estimate 2019 bad debt expense if losses from uncollectible accounts for 2018 were What other action would management consider?

To determine

(a)

Credit Sales Method:

The method named percentage of credit sales method is the method in which the bad debts are computed on the basis of percentage of sales.

Uncollectible accounts:

These are those accounts which reflect that amount of credit sales which is not to be collected i.e. bad debts.

To calculate:

The average percentage of loss rate for each year from $2015$.

Answer to Problem 65E

The loss Rate over the period is:

Year of Sales	Loss Rate Percentage
$2015$	$1.49\%$
$2016$	$1.56\%$
$2017$	$1.55\%$
$2018$	$1.42\%$

The average percentage of loss rate is $1.50\%$.

Explanation of Solution

The Porile Company has a glass store which sells on credit. The data of past four years showing its credit sales and losses from uncollectible accounts are as follows:

Year of Sales	Credit Sales $\left(\$\right)$	Losses from Uncollectible Accounts $\left(\$\right)$
$2015$	$8,83,000$	$13,125$
$2016$	$9,52,000$	$14,840$
$2017$	$10,83,000$	$16,790$
$2018$	$11,89,000$	$16,850$

This is given in the question.

The loss rate from uncollectible accounts for the Porile Company is as follows:

Year of Sales	Credit Sales $\left(\$\right)$	Losses from Uncollectible Accounts $\left(\$\right)$	Loss Rate Percentage $(\ast )$
$2015$	$8,83,000$	$13,125$	$1.49\%$
$2016$	$9,52,000$	$14,840$	$1.56\%$
$2017$	$10,83,000$	$16,790$	$1.55\%$
$2018$	$11,89,000$	$16,850$	$1.42\%$
Average Percentage of losses	$1.50\%$

$(\ast )$ The computation of loss rate from uncollectible accounts should be done by following formula:

$\text{Loss Rate}=\frac{\text{Uncollectible Accounts}}{\text{Net Credit Sales}}\times 100$.

To determine

(b)

Credit Sales Method:

The method named percentage of credit sales method is the method in which the bad debts are computed on the basis of percentage of sales.

Uncollectible accounts:

These are those accounts which reflect that amount of credit sales which is not to be collected i.e. bad debts.

To calculate:

The loss rate for estimating the bad debt for $2019$ and bad debt expense for $2019$.

Answer to Problem 65E

The loss rate for estimating the bad debt in the year $2019$ is $1.49\%$ and the bad debt expense for $2019$ is $\$18,774$.

Explanation of Solution

The Porile Company has a glass store which sells on credit. The data of past four years showing its credit sales and losses from uncollectible accounts are as follows:

Year of Sales	Credit Sales $\left(\$\right)$	Losses from Uncollectible Accounts $\left(\$\right)$
$2015$	$8,83,000$	$13,125$
$2016$	$9,52,000$	$14,840$
$2017$	$10,83,000$	$16,790$
$2018$	$11,89,000$	$16,850$

The credit sales given in the question is $\$12,60,000$ and the percentage of bad debts calculated on weighted average on the sales is $1.49\%$. This is given in the question.

The loss rate for estimating the bad debt in the year $2019$ for the Porile Company is as follows:

Year	Credit Sales $\left(\$\right)$	Losses from Uncollectible Accounts $\left(\$\right)$	Loss Rate Percentage	Weights	Weighted Average of Loss
	$\left(\text{a}\right)$	$\left(\text{b}\right)$	$\left(\text{c}\right)=\left(\text{b}\right)÷\left(\text{a}\right)$		$\left(\text{e}\right)=\left(\text{c}\right)\times \left(\text{d}\right)$
$2015$	$8,83,000$	$13,125$	$1.49\%$	$1$	$1.49\%$
$2016$	$9,52,000$	$14,840$	$1.56\%$	$2$	$3.12$
$2017$	$10,83,000$	$16,790$	$1.55\%$	$3$	$4.65$
$2018$	$11,89,000$	$16,850$	$1.42\%$	$4$	$5.67\%$
				$10.00$	$1.49\%$

So, the bad debt expense to be recognised:

$\begin{array}{c}\text{Bad Debt Expense}=\text{Sales amount}\times \text{Percentage of bad debt}\\ =\$12,60,000\times 1.49\%\\ =\$18,774\end{array}$.

To determine

(c)

Credit Sales Method:

The method named percentage of credit sales method is the method in which the bad debts are computed on the basis of percentage of sales.

Uncollectible accounts:

These are those accounts which reflect that amount of credit sales which is not to be collected i.e. bad debts.

The reasonability of estimate of the bad debt expense.

Answer to Problem 65E

The estimation of the bad debts for $2019$ is reasonable due to the method used for calculating the percentage of loss rate.

Explanation of Solution

The method of calculating the average percentage of loss rate used is the weighted average method which is used for the reason that the amount of uncollectible accounts are on increasing trend. In this trend, this method is the best for calculation. Thus, it can be said that this bad debt expense is reasonable in nature.

To determine

(d)

Credit Sales Method:

The method named percentage of credit sales method is the method in which the bad debts are computed on the basis of percentage of sales.

Uncollectible accounts:

These are those accounts which reflect that amount of credit sales which is not to be collected i.e. bad debts.

The estimation of bad debt and the reaction of the management for the bad debt of $2019$, if the losses from uncollectible in $2018$ were $\$30,000$.

Answer to Problem 65E

The bad debt expense should not be computed as per weighted average percentage. The company should go for ascertain a specified percentage to calculate the bad debt.

Explanation of Solution

The Porile Company has a glass store which sells on credit. The losses from uncollectible in $2018$ were $\$30,000$. This is given in the question.

The bad expense for the year $2019$ should be computed as per a specified percentage ascertained by the company as in this increased scenario, the weighted average method will not be considered accurate or possibly better o compute the bad debt expense.