BAD DEBT EXPENSE: PERCENTAGE OF CREDIT SALES METHOD
The Glass House, a glass and china store, sells nearly half its merchandise on credit. Dur- ing the past four years, the following data were developed for credit sales and losses from uncollectible accounts:
|
Year of Sales
|
Credit Sales
|
Losses from Uncollectible Accounts*
|
|
2006
|
$197,000
|
$12,608
|
|
2007
|
202,000
|
13,299
|
|
2008
|
212,000
|
13,285
|
|
2009
|
273,000
|
22,274
|
|
Total
|
$884,000
|
$61,466
|
*Losses from uncollectible accounts are the actual losses related to sales of that year (rather than write-offs of that year).
In 2010, The Glass House expanded its line significantly and began to sell to new kinds of customers.
Required:
1. Calculate the loss rate for each year from 2006 through 2009.
2. Determine whether there appears to be a significant change in the loss rate over time.
3. If credit sales for 2010 are $392,000, determine what loss rate you would recom- mend to estimate bad debts.
4. Using the rate you recommend, record bad debt expense for 2010.