Question: Kelly’s Collectibles sells nearly half its
Kelly’s Collectibles sells nearly half its merchandise on credit. During the past 4 years, the following data were developed for credit sales and losses from uncollectible accounts: 
* Losses from uncollectible accounts are the actual losses related to sales of that year (rather than write-offs of that year). Required: 1. Calculate the loss rate for each year from 2016 through 2019. (Note: Round answers to three decimal places.) 2. Determine if there appears to be a significant change in the loss rate over time. 3. If credit sales for 2020 are $182,000, explain what loss rate you would recommend to estimate bad debts. (Note: Round answers to three decimal places.) 4. Using the rate you recommend, record bad debt expense for 2020. 5. Assume that the increase in Kelly’s sales in 2020 was largely due to granting credit to customers who would have been denied credit in previous years. How would this change your answer to Requirement 4? Describe a legitimate business reason why Kelly’s would adopt more lenient credit terms. 6. Using the data from 2016 through 2019, estimate the increase in income from operations in total for those 4 years assuming (a) the average gross margin is 45% and (b) 20% of the sales would have been lost if no credit was granted (round to nearest dollar).
Transcribed Image Text:
Losses from Year of Sales Credit Sales Uncollectible Accounts* 2016 $125,900 102,440 $10,007 8,762 2017 2018 131,120 9,849 2019 149,780 $509,240 12,303 Total $40,921
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