Calculating Bad Debt Expense
Dandy’s Discount Duds offers credit to all customers. It estimated that 15 percent of all such customers will not be able to pay their accounts. Dandy’s credit sales in 2000 were $4,000,000. Its estimated bad debt expense was calculated at 15 percent of annual credit sales.
Required
a. What is the effect of estimated bad debts on net income in 2000?
b. In early 2001, Dandy discovered that half of its customers have been laid off because a major automaker closed two of its plants. Dandy found that 25 percent of its customers will not be able to pay their accounts. What impact will this new realization have on Dandy’s income for 2001?
c. If a retroactive adjustment to 2000’s net income were necessary, what other information is needed that is not shown in this problem?
d. Why is it appropriate that such adjustments to estimates be shown on a prospective basis?
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