For Year Ended December 31 Year 8 Year 7 Year 6 From income statement Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 333 $ 291 $ 496 Bad debt expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105 81 65 Operating revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,719 3,534 3,074 December 31 Year 8 Year 7 From balance sheet Accounts receivable, net of allowance for doubtful accounts (Year 8, $212; Year 7, $183) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $951 $972 Bad debt expense on accounts receivable is substantial in relation to earnings. Assume a corporate tax rate of 40%. Information on accounts receivable written off and recoveries of accounts receivable previously written off was not available from the annual reports. Required a. What effect would each of the following have on Year 8 net income and Year 8 ending balance sheet ac- counts? Ignore differences between tax and financial reporting systems. 1. Failure to provide for any bad debt expense. 2. Failure to write off a worthless account of $0.6 million. b. Assuming insignificant recoveries of bad debts previously written off, estimate write-offs of accounts re- ceivable in Year 8. c. For both Year 8 and Year 7, compute and comment on 1. The relation between bad debt expense and operating revenue. 2. The rate of uncollectible accounts as a percentage of gross accounts receivable. 3. The relation between bad debt expense and write-offs.
For Year Ended December 31 Year 8 Year 7 Year 6
From income statement
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 333 $ 291 $ 496
Bad debt expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105 81 65
Operating revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,719 3,534 3,074
December 31 Year 8 Year 7
From balance sheet
Accounts receivable, net of allowance for doubtful accounts (Year 8, $212;
Year 7, $183) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $951 $972
Bad debt expense on accounts receivable is substantial in relation to earnings. Assume a corporate tax rate of
40%. Information on accounts receivable written off and recoveries of accounts receivable previously written off
was not available from the annual reports.
Required
a. What effect would each of the following have on Year 8 net income and Year 8 ending balance sheet ac-
counts? Ignore differences between tax and financial reporting systems.
1. Failure to provide for any bad debt expense.
2. Failure to write off a worthless account of $0.6 million.
b. Assuming insignificant recoveries of
ceivable in Year 8.
c. For both Year 8 and Year 7, compute and comment on
1. The relation between bad debt expense and operating revenue.
2. The rate of uncollectible accounts as a percentage of gross accounts receivable.
3. The relation between bad debt expense and write-offs.
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