The Dubious Company operates in an industry where all sales are made on account.The company has experienced bad debt losses of 1% of credit sales in prior periods.
Presented below is the company's forecast of sales and expenses over the next three years.
Required:
Part a.Calculate Bad Debt Expense and net income for each of the three years,assuming uncollectible accounts are estimated as 1.0% of sales.
Part b.Briefly describe the trend in net income changes from Year 1 to Year 2 and from Year 2 to Year 3.
Part c.Assume that 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.
Part d.Briefly describe the trend in net income changes determined in requirement c from Year 1 to Year 2 and Year 2 to Year 3.
Part e.Explain some of the factors that might cause the estimate of uncollectible accounts to vary from year to year (as in the assumption set forth in part c above).
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