Question

The Dubious Company operates in an industry where all sales are made on account. The company has experienced bad debt losses of 1.30% of credit sales in prior periods.

Presented below is the company's forecast of sales and expenses over the next three years.

	Year 1				Year 2				Year 3
Sales Revenue	$	387,000			$	393,000			$	392,000
Bad Debt Expense		Unknown				Unknown				Unknown
Other Expenses		332,000				334,000				342,750
Net Income		Unknown				Unknown				Unknown

Required:

1. Calculate Bad Debt Expense and net income for each of the three years, assuming uncollectible accounts are estimated as 1.30% of sales.
2. Assume that the company changes its estimate of uncollectible credit sales to 1.30% in Year 1, 2.30% in Year 2 and 1.80% in Year 3. Calculate the Bad Debt Expense and net income for each of the three years under this alternative scenario.

Answer 1

Requirement a:

	Year 1	Year 2	Year 3
Sales Revenue	$387,000	$393,000	$392,000
Bad debt expense [1.30 % of sales]	($5,031)	($5,109)	($5,096)
Other expenses	($332,000)	($334,000)	($342,750)
Net income	$49,969	$53,891	$44,154

Requirement b:

	Year 1	Year 2	Year 3
Sales Revenue	$387,000	$393,000	$392,000
Bad debt expense
[387,000 x 1.30%]	($5,031)
[393,000 x 2.30%]		($9,039)
[392,000 x 1.80%]			($7,056)
Other expenses	($332,000)	($334,000)	($342,750)
Net income	$49,969	$49,961	$42,194