Accounting Case2

Case 2 [JACOBIAN STEEL

Created by M. Mari Fall 2014 Page 1 of 2

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%.

Case 2 [JACOBIAN STEEL

Created by M. Mari Fall 2014 Page 2 of 2

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.