Case ASSIGNMENT JACOBIAN STEEL
Jacobian Steel Manufacturing sells bulk steel products for maritime construction. The company has used the allowance method for estimated bad debts for several years.
Specifically they estimate that 6% of credit sales will go bad each year. Over the past several years, Jacobian has seen that year-end allowance account has a debit balance before adjustment. The company wants an in-depth analyzes of bad debts and a determination as to which method to use. You have been hired to perform the study. During your review of their financial records, the following data becomes available.
Credit Sales:
|
Year
|
Total Sales
|
% on credit
|
|
2010
|
$1,000,000
|
60%
|
|
2011
|
$1,800,000
|
70%
|
|
2012
|
$2,000,000
|
75%
|
Write offs:
|
Year
|
Bad debts written off
|
|
2010
|
$52,000
|
|
2011
|
$96,000
|
|
2012
|
$60,000
|
Allowance Balance on December 31, 2005 before adjustment:
|
Year
|
Balance
|
|
2010
|
$6,000
|
|
2011
|
$42,000
|
|
2012
|
$12,000
|
Aging of Accounts Receivable:
2012
|
|
Accounts Receivable
|
Percentage uncollectible
|
|
Not due
|
$250,000
|
6%
|
|
1-30 past due
|
$110,000
|
15%
|
|
31-60
|
$140,000
|
20%
|
|
61- 90
|
$90,000
|
30%
|
|
Over 90 days
|
$40,000
|
60%
|
- Considering also using percentage of accounts receivable balance to compute estimated uncollectible for period. Jacobian considers using 12%.
Accounts Receivable Balance:
|
Year
|
Year end Balance
|
|
2010
|
$365,000
|
|
2011
|
$425,000
|
|
2012
|
$630,000
|
Which method should they use and why? Calculate bad debts under each method and find the method closest to the actual bad debts.