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CP 9-2

For several years, Xtreme Co.s sales have been on a cash only basis. On January 1 2013, however Xtreme Co. began offering credit on terms of n/30. The amount of the adjusting entry to record the estimated uncollectable receivables at the end of each year has been 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
2013	4000000	5000
2014	4400000	8250
2015	4800000	10200
2016	5100000	14400

Laurie Jones, President of Xtreme Co., is concerned that the method used to account for and write off uncollectible receivables is unsatisfactory. She has asked for your advice in the analysis of past operations in this area and for recommendations or change.

Determine the amount of (a) the addition to Allowance of Doubtful Accounts hand (b) the accounts written off for each of the four years.

A. Advise Laurie Jones as to whether the estimate of of 1% of credit sales appears reasonable.

B. Assume that after discussing (a) with Laurie Jones, she asked you what actions might be taken to determine what the balance of Allowance for Doubtful Accounts should be at December 31, 2016, and what possible changes, if any, you might recommend in accounting for uncollectible receivables. How would you respond?

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