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.
Year 1
b.Describe the trend in net income changes from Year 1 to Year 2 and from Year 2 to Year 3.
It is increasing
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. Describe the trend in net income changes determined in requirement c from Year 1 to Year 2 and Year 2 to Year 3.
e. Explain some of the factors that might cause the estimate of uncollectible accounts to vary from year to year as in part c above.