Question: At a January 2015 meeting, the president of Hook the Crook Company announced the credit evaluation department was being disbanded because it had restricted the company's growth. The sales staff would now make credit decisions.
By the end of the year, Hook the Crook had generated significant gains in sales and the president was very pleased. The accounting department provided the following data:
|
2015 |
2014 |
| Sales (all are on credit) |
$24,000,000 |
$8,000,000 |
| Cost of goods sold |
21,000,000 |
7,000,000 |
| Accounts Receivable |
13,000,000 |
1,000,000 |
| Allowance for bad debt, 13/31 |
? |
30,000 |
The $13,000,000 receivables balance was aged as follows:
| Age of receivable |
Amount |
Percentage expected to be collected Under 31 days |
| Under 31 days |
$4,000,000 |
95% |
| 31-61 days |
$3,500,000 |
90% |
| 61-90 days |
$3,000,000 |
75% |
| Over 90 days |
$2,500,000 |
50% |
$30,000 were written off during 2015 and the rest of the balance of accounts receivable from December 31, 2014 was collected. No accounts were written off for 2015 credit sales.
Required: a. Estimate the amount of uncollectible accounts as of December 31, 2015 and find the bad debt expense for 2015. Provide the journal entry for recording the bad debt expense.
b. Why should a company record a bad debt expense during the current year, when it is going to realize a specific account is uncollectible only in the future (say next year)?
c. Compute the amount expected to be collected (also known as net-realizable-value) as a percentage of respective year-end receivables balance at the end of 2014 and 2015.
d. Assume the increase in sales was due only to the change in credit policy. Was the president's decision justifiable?