Prepare a memo to Ursula Sykes
For several years, sales have been on a "cash only" basis. On January 1, 2005, however, Litespeed Co. began offering credit on terms of n/30. The amount of the adjusting entry to record the estimated uncollectibles receivables at the end of each year has been 1/4 of 1% of credit sales, which is the rate reported as the average for the industry. Credit sales and the year-end credit balances in Allowance for Doubtful Accounts for the past four years are as follows:
Year
Credit Sales
Allowance for Doubtful Accounts
2005
$8,160,000
$8,520
2006
8,400,000
15,840
2007
8,520,000
22,680
2008
8,700,000
32,820
Ursula Sykes, president of Litespeed Co. is concerned that the method used to account for and write off uncollectible receivables in unsatisfactory. She has asked for your advice in the analysis of past operations in this area and for recommendations for change.
Determine the amount of (a) the addition to Allowance for Doubtful Accounts and (b) the accounts written off for each of the four years.
Prepare a memo to Ursula Sykes advising whether you believe the estimate of 1/4 of 1% of credit sales appears reasonable. Also include what you have determined to be the balance in the Allowance for Doubtful Accounts at December 31, 2008. Recommend any possible changes that you feel may be necessary in accounting for uncollectible receivables. Support your findings.
