etermine the amount of (a) the addition to Allowance for Doubtful Accounts and (b) the accounts written off for each of the four years.
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.
For several years, Xtreme Co's sales have been on a "cash only" basis. On January 1, 2011, however, Xtreme Co. began offering credit on terms of n/30. The amount of the
| Year | Credit Sales | Allowance for Doubtful Accounts |
|---|---|---|
| 2011 | 4,000,000 | 5,000 |
| 2012 | 4,400,000 | 8,250 |
| 2013 | 4,800,000 | 10,200 |
| 2014 | 5,100,000 | 14,400 |
Laurie Jones, president of Xtreme Co., is concerned that the method used to account for and writeoff uncollectible receivables is unsatisfactory. She has asked for your advice in the analysis of past operations in this area and for recommendations for change.
INSTRUCTION: Determine the amount of (a) the addition to Allowance for Doubtful Accounts and (b) the accounts written off for each of the four years.
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- Advise the president as to whether the estimate of ¼ of 1% of credit sales appears reasonable.
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