I need help answering questions stated in this case. Thank you Your client, Clar

Question

I need help answering questions stated in this case. Thank you

Your client, Clarkson Outdoors, Inc.is a wholesale merchandising business that sells outdoor furniture.   The company’s average monthly sales revenue is $250,000 representing approximately 5,000 inventory items sold.   Historically, it has a bad debt experience of approximately 1.5% of sales revenue.   The company controller is seeking some guidance from you regarding the proper accounting for receivables, bad debts and the allowance for doubtful accounts. She has asked you the following questions:

•How should we set up the allowance account? We have considered basing it on some percentage of all receivables (should we age the receivables?) or basing it on the valuation of the past due and questionable accounts receivables. Shouldn’t we focus on the actual uncollectibles? Should we charge them against the allowance at the end of the period or should they be written off against gross sales?    If an account is determined to be uncollectible in the current accounting period, shouldn’t we record bad debt expense then?

•We have expenditures when we make attempts to collect outstanding receivables –we pay for collection agencies and legal help in making collections. How should we record these amounts? We have considered (a) bad debt expense, (b) allowance for doubtful accounts, (c) legal expense or (d) administrative expenses.  

Explanation / Answer

Facts of the case:- Name of the client- Clarkson Outdoors Average Monthly sale revenue 250000$ Approx 5000 Unis sold Bad Experince of 1.5% of total sale Becomes Bad Debts or uncollectible Understanding & Solution As per the given facts there is 1.5% chances everytime in each month which becomes Bad debt/ Uncollectible customer Okay, to start with the provisioning we should firstly nderstand the credit plocy of the client,means if the credit sale is done then how much tenure is gven to the customer for the payment. Then client shoukd also do Account receivable aging like 0-10 ,11-30,31-60,61-90 days. This can be done by using Debtor turnover ratio and Average Collection period concept. Debtor Turnover ratio= Turnover/ Average Receivable Average Collecion Perod= 365/Debtor Turnover Ratio This will optimize the collection and receivable However, as per the experience The company Is Having Loss of 1.5% of sale . Therefore accounting treatment can be done as follows:- Bad Debt A/c Dr 3750 (1.5% *250000) To Provision For Bad Debt 3750 Bad Debt can be charged to P&L account as an expense and provsion is shown on the laibility side which is uncollectible P&L Account To Bad Debt    3,750.00 To Net Profit XXXXX B/S Capital & Liability Assets Capital XXX Account receivable 250000 Reserves & Surplus XXX Provision For Bad Debts 3750 (b) If the company is attemptng to collect the receivable via paying to the agencies then they can show under administrative expense

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