California co.follows the procedure of debiting Bad debt expense for 2% of all s

Question

California co.follows the procedure of debiting Bad debt expense for 2% of all sales. Sales for 4 yrs and corresponding balances in the allowance for bad debts account were as follows:

Year sales allowance for bad debts

end-of-year credit balance

2010 $3,000,000 $44,600

2011 2,850,000 61,600

2012 3,600,000 82,800

2013 3,940,000 123,000

1) calculate the amounts written off for the years 2011,2012 and 2013. Show work.

2)the external auditors are concerned with the growing amount in the allowance account. What action should be taken, if any?

Explanation / Answer

(1) Amount written off for year 2011 = 61600 - 44600 = $17000 Amount written off for year 2012 = 82800 - 61600 = $21200 Amount written off for year 2013 = 123000 - 82800 = $40200 (2) The auditor should review the aged receivables to see whether credit check has been applied by the company for new and existing customers. This will serve as a purpose in identifying any possible fraud. Hope this helps!

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