ABCDEFGHIJKLMNOPQRSTUVWXYZ
1
At a January 2019 meeting, the president of the “Hook the Crook” Company announced that the credit evaluation department was being
2
disbanded because it had restricted the company’s growth. The sales staff would now make credit decisions.
3
By the end of the year, Hook the Crook had generated significant gains in sales and the president
4
was very pleased. The accounting department provided the following data:
5
6
Sales (all are on credit)$24,000,000 $8,000,000
7
Cost Of Goods Sold21,000,0007,000,000
8
Accounts Receivable13,000,0001,000,000
9
Allowance for bad debt, 12/31 ?30,000
10
11
The $13,000,000 receivables balance was aged as follows:
12
13
Age of receivableAmount
Percentage expected to be collected
14
Under 31 days$4,000,000 95%
15
31-60 days$3,500,000 90%
16
61-90 days$3,000,000 75%
17
Over 90 days$2,500,000 50%
18
19
20
$30,000 was written off during 2019, and the remaining balance of
21
accounts receivable (from December 31, 2018) was collected. No accounts were written off related to 2019 credit sales.
22
23
a) Estimate the amount of uncollectible accounts as of December 31, 2019, and compute the bad debt expense for 2019.
24
Record the transaction related to the bad debt expense.
25
26
AgeTotal AmountUncollectible
27
Under 31 days$4,000,000
28
31-60 days$3,500,000
29
61-90 days$3,000,000
30
Over 90 days$2,500,000
31
32
33
Expected Amount of Uncollectible A/R
34
35
Dr Bad Debt Expense
36
 Cr Allowance for Bad Debts
37
38
b) Why should a company record a bad debt expense during the current year,
39
when it is going to realize a specific account is uncollectible only in the future (say next year)?
40
41
1) Matching of Revenues and Expenses
42
43
44
2) Conservatism
45
46
47
48
49
50
51
52
53
54
c) Compute the amount the company expects to collect (also known as net-realizable-value) as a
55
percentage of the respective year-end receivable balances, at the end of 2019 and 2018.
56
57
Uncollectible AmountTotal A/RYearPercentage
58
59
60
61
62
d) Assume the increase in sales was due only to the change in credit policy. Was the president’s decision justifiable?
63
64
There are many different things we need to consider here. The first (and most obvious) is the effect that this had
65
on the bad debt expense for the year relative to the new sales that we had.
66
67
20192018
68
Sales (all on credit)
69
COGS
70
Gross Profit
71
Bad Debt Expense
72
Profit after BDE
73
Change from 2018 - 2019
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
100