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When a company extends credit to its customers, the company realizes it will not likely collect all of the related accounts receivable. As some accounts may prove to be uncollectible, a company must estimate its bad debt expense.
Required:
a. What is the purpose of estimating bad debt expense?
b. There are two relationships that can be used to estimate the bad debt expense for a company. Describe the two major relationships that can be used to estimate bad debts expense and the financial statement orientation of each.
Monopolistically Competitive
A market structure characterized by many firms selling products that are substitutes but not perfect substitutes, leading to some degree of market power for each firm.
Fixed Costs
Costs that do not change with the level of output produced, such as rent, salaries, and loan repayments.
Short Run
A period in which at least one of a firm's inputs is fixed and cannot be changed.
Monopolistically Competitive
A market structure with many firms selling products that are substitutes but differentiated enough that each firm's product has its own demand.
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