The Dubious Company Operates in an Industry Where All Sales

question 16

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.
$$\begin{array} { | l | r | r | r | } \hline & \text { Year } & 2 & \\\hline \text { Sales Reverue } & \mathbf { 5 6 8 , 0 0 0 } & \mathbf { \$ 3 7 4 , 0 0 0 } & \mathbf { \$ 3 7 3 , 0 0 0 } \\\hline \text { Bad Debt Expense } & & & \\\hline \text { Other Expenses } & \underline { 340,000 } & \underline { \mathbf { 3 4 2 , 0 0 0 } } & \underline { \mathbf { 3 4 2 , 7 5 0 } } \\\hline \text { Net Income } & & & \\\hline\end{array}$$ Using this information:
a.Calculate bad debt expense and net income for each of 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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