Reference no: EM131442899

Case ASSIGNMENT JACOBIAN STEEL

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%.

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.