Accounting Case

Group 8 Sears Case

9/11/2017

"We acknowledge that we adhered to the Rice Honor Code and that we did not receive any outside assistance on this assignment"

1. Using an income statement approach, what do you think is an appropriate amount of bad debt expense and allowance for bad debts in 1999?

Current Provision = Historical Provision / Historical Credit Sales x Current Credit Sales

1998 Provision:  $1,287 (from Provision for uncollectible accounts)

1998 Sales:  51.6% x $36,957 = $19,070

(Sears Card sales as a % of sales x Merchandise sales and services)

1999 Sales:  47.9% x $36,728 = $17,593

(Sears Card sales as a % of sales x Merchandise sales and services)

Bad debt expense / Provision for 1999 = $1,287 / $19,070 x $17,593 = $1,187

Allowance, beginning of 1999                   974

Provision for uncollectible accts        1,187

Net credit losses                        1,085

Allowance, end of 1999                1,076  

1. Using a balance sheet approach, what do you think is an appropriate amount of bad debt expense and allowance for bad debts in 1999?

Current Allowance = Historical Allowance / Historical Gross Receivables x Current Receivables

1998 Allowance:  $974 (from Allowance for uncollectible accounts)

1998 Gross Receivables: $18,946 (from Credit card receivables)

1999 Gross Receivables: $18,793 (from Credit card receivables)

Allowance for 1998 = $974 / $18,946 x $18,793 = $966

Allowance, beginning of 1999                   974

Provision for uncollectible accts              x

Net credit losses                        1,085

Allowance, end of 1999                   966

Bad debt expense / Provision for uncollectible accts, x = 966 + 1,085 - 974 = 1,077

1. Based on your analysis in questions 1 and 2, and any other information in the case that you believe is relevant, what is your team’s best estimate of bad debt expense and the allowance for bad debts in 1999?

By using the balance sheet approach the provision for uncollectible accounts is 1077. The balance sheet approach does not break out interest income from expected credit card receivables. As such its value will be closer to the actual credit losses because interest payments will offset delinquent accounts. Therefore, the balance sheet method is preferable because it relates provision and allowance to gross receivables rather than sales.