The Dubious Company Operates in an Industry Where All Sales

question 121

Essay

The Dubious Company operates in an industry where all sales are made on account. Historically, Dubious has experienced a steady 1.0% of credit sales being uncollectible. Presented below is the company's forecast of sales and expenses over the next three years. Using this information:
a. Calculate bad debt expense and net income for each of the three years, assuming uncollectible accounts are
estimated as 1.0% of sales.
b. Comment on the trend in net income changes from Year 1 to Year 2 and from Year 2 to Year 3.
c. Suppose the company changes its estimate of uncollectible credit sales to 1.0% in year 1, 2.0% in year 2 and
1.5% in year 3. Calculate the bad debt expense and net income for each of the three years under this alternative
scenario.
d. Comment on the trend in net income changes determined in requirement c from Year 1 to Year 2 and Year 2
to Year 3.
e. Under which scenario (a or c) do you feel most confident when predicting the net income likely to be earned in Year 4? What contributes to this feeling?

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