Question

National Telecommunication (NT), a provider of telecommunication services to businesses, has been in existence for a few years. All of NT’s sales are on credit. This year, NT expects to increase net income from the previous year by 5%. However, this growth may not be sustainable due to new and advanced technology used by competitors in the industry.

The industry average for percentage used for allowance for doubtful debt is between 1% and 3%.

The Chief Executive Officer (CEO) suggests that you (the controller) increase the company’s percentage used for allowance for doubtful debt from 1.5% to 3% of accounts receivables. That way, the percentage used for allowance for doubtful debt is still within acceptable industry range. The CEO also argues that with the change, this year’s net income will be lower and will show a modest 2% increase from previous year. This revised growth rate will be more in line with expected future growth rate.

1. Do you agree with the CEO regarding the change in the allowance for doubtful debt? Why or why not?
2. Are you going to recalculate the allowance for doubtful debt and revise net income? Why or why not?
3. What is the proper accounting treatment for the growth rate in estimating the allowance for doubtful debt? Explain your answer.

Answer 1

Answer National Telecommunication Service to been in existence for a few year No expects to increase net income from the perines 5% Formule for net profet Ration 1 . Net profet x 100 .. sales The total salles are on Credeb baris Account receivable may not consist of fotal. Sales for the year as the collections made from account Debts in increased from list to 3% account receivable this would not directy decrease profit by 1.5%

3) 3-1.5 =1.5% Tan impact on the expense it means after the effect of increase in allowance for doubtful debts The increase in doubtful debts has resulted into $1,000 Tout impact would be = 1000 - 1000 7354 . iie = 650 . . 1000 The Argument of ceo that this year increase Net incomes would be 2% aft intrees in allowance . CEO argument that to decrease the het profits for the Current year increase in allowance for dourful debts has to increased

A correct strategy. The company needs to follow in consistently any change in accounting policy needs to be disclosed in the notes accounts coorect strategy to lessen. the profil of one year by changing the policy of creating provision to allowance for doubtful debts.