In: Accounting
CT8.1
RFL Company sells office equipment and supplies to many organizations in the city and surrounding area on contract terms of 2/10, n/30. In the past, over 75% of the credit customers have taken advantage of the discount by paying within 10 days of the invoice date.
The number of customers taking the full 30 days to pay has increased within the last year. Current indications are that less than 60% of the customers are now taking the discount. Bad debts as a percentage of gross credit sales have risen from the 2.5% provided in the past years to about 4.5% in the current year.
The company's Finance Committee has requested more information n
the collections of accounts receivable. The controller responded to
this request with the following report.
RFL Company
Accounts Receivable Collections
May 31, 2020
The fact that some credit accounts will prove uncollectible is normal. Annual bad debt write-offs have been 2.5% of gross credit sales over the past 5 years. During the last fiscal year, this percentage increased to slightly less than 4.5%. The current Accounts Receivable balance is $1,400,000. The condition of this balance in terms of age and probability of collection is as follows:
Proportion of Total Age Categories Probability of Collection
60% Not yet due 98%
22% Less than 30 days past due 96%
9% 30 to 60 days past due 94%
5% 61 to 120 days past due 91%
2.5% 121 to 180 days past due 75%
1.5% over 180 days past due 30%
Allowances for Doubtful Accounts had a credit balance of $29,500
on June 1, 2019. FRL has provided for a month bad debt expense
accrual during the current fiscal year based on the assumption that
4.5% of gross credit sales will be uncollectible. Total gross
credit sales for the 2019-2020 fiscal year amounted to $2,900,000.
Write-offs of bad accounts during the year totaled
$102,000.
Instructions
A. Prepare an accounts receivable aging
schedule for RFL Company using the age categories identified in the
controller's report to the Finance Committee showing the
following.
1. The amount of accounts receivable outstanding for each age
category and in total.
2. The estimated amount that is uncollectible for each category and
in total.
B. Compute the amount of the year-end adjustment necessary to bring Allowances for Doubtful Accounts to the balance indicated by the age analysis. Then prepare the necessary journal entry to adjust the accounting records.
C. In a recessionary environment with tight
credit and high-interest rates:
1. Identify steps RLF Company might consider to improve the
accounts receivable situation.
2. Then evaluate each step identified in terms of the risks and
costs involved.
(a)
RFL COMPANY
Accounts Receivable Aging Schedule
May 31, 2020
Proportion of Total |
Amount in Category |
Probability of Non- Collection |
Estimated Uncollectible Amount |
||||||
Not yet due Less than 30 days past due 30 to 60 days past due 61 to 120 days past due 121 to 180 days past due Over 180 days past due |
.600 .220 .090 .050 .025 .015 1.000 |
$ 840,000 308,000 126,000 70,000 35,000 21,000 $1,400,000 |
.02 .04 .06 .09 .25 .70 |
$16,800 12,320 7,560 6,300 8,750 14,700 $66,430 |
(b)
RFL COMPANY
Analysis of Allowance for Doubtful Accounts
May 31, 2020
June 1, 2018 balance................................................................................... $ 29,500
Bad debt expense accrual ($2,900,000 X .045).......................................... 130,500
Balance before write-offs of bad accounts................................................. 160,000
Write-offs of bad accounts......................................................................... 102,000
Balance before year-end adjustment.......................................................... 58,000
Estimated uncollectible amount.................................................................. 66,430
Additional allowance needed..................................................................... $ 8,430
Bad Debt Expense.............................................................................................. 8,430
Allowance for Doubtful Accounts.................................................................... 8,430
(c)
1. |
Steps to Improve the Accounts Receivable Situation |
2. |
Risks and Costs Involved |
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Establish more selective credit-granting policies, such as more restrictive credit requirements or more thorough credit investigations. |
This policy could result in lost sales and increased costs of credit evaluation. The company may be all but forced to adhere to the prevailing credit-granting policies of the office equipment and supplies industry. |
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Establish a more rigorous collection policy either through external collection agencies or by its own personnel. |
This policy may offend current customers and thus risk future sales. Increased collection costs could result from this policy. |
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Charge interest on overdue accounts. Insist on cash on delivery (cod) or cash on order (coo) for new customers or poor credit risks. |
This policy could result in lost sales and increased administrative costs. |