Reference no: EM132646476

Question - Three years after Emily Morgan and Nathan James launched Ithaca Fountains Pen, Inc., (IFP) it was clear that the company had enjoyed a great deal of success. The company had expanded tremendously, both in terms of the number of employees as well as products offered to customers. Despite the expansion, Emily and Nathan were convinced that the company could be even bigger and better in the coming years.

It was a good thing that Emily and Nathan had been keeping such detailed financial records since the company began - they knew that it would be easier to get investors to trust them (and give them funding) if they could show investors just how well they had been performing.

At the same time, they remembered from their financial accounting course during an MBA program that their accounting choices could affect the numbers that the company reported, even if the underlying economics were unchanged. While they did not want to be misleading or aggressive in their accounting choices, they did want to make sure that they were reporting in a way that was comparable to their competitors, and not putting them at a disadvantage when it came to attracting investors.

Assume that it is the end of 2019 and Emily and Nathan are considering options for creating their financial reports for that year.

PART A - RECEVABLES

Emily and Nathan decided to first take a closer look at how they had been dealing with Accounts Receivable. For simplicity, they had always just assumed that 4% of their sales on account (i.e., on credit terms) would turn out to be uncollectible. However, as time passed they had gotten better and better at identifying which customers were likely to be creditworthy. They also noted that one of their primary competitors appeared to assume that only 2.25% of sales on account would be uncollectible.

In 2019, IFP had made $1,500,000 in sales on account, had a beginning (opening) credit balance in the Allowance for Doubtful Accounts of $62,600, and had written off $36,000 in uncollectible accounts for the year.

1) Assuming they continue to use the percentage of sales method, and maintain the assumption that 4% of sales on account will be uncollectible, determine (a) the ending (closing) balance in the Allowance for Doubtful Accounts for 2019, as well as (b) how much bad debt expense would be recorded for 2019.