Heritage Mill Works sells finished lumber and mouldings

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Heritage Mill Works sells finished lumber and mouldings to a variety of housing contractors.
Given the nature of the business, most of its sales are on credit, and careful management of
credit and bad debts is a critical success factor for this business. The normal credit period is 60
days.The company's owners place significant emphasis on the operating results as they appear
on the statement of earnings. They believe that accurate net earnings are the best indicator of
any business s success. The owners are currently looking at revising their credit-granting
policies in light of a number of large write-offs that were made in the past year. They are also
wondering whether notes receivable should be used in the future for certain types of customers
and for very large sales.Karen Starkly is the accounts receivable clerk for the business and has
been asked by the controller to prepare an estimate of bad debts expense for the company, to
be used in preparing the annual financial statements. The company had sales of $3,450,000
during the year, of which 9(Y/t were on credit. Historically, the percentage of bad debts has
varied from 2% to 4% of credit sales. Bad debts are usually higher in times of economic
downturns. Karen notes that business has been strong this year for the entire industry, since
interest rate reductions have led to a boom in new housing starts.The balance in the accounts
receivable account on December 31 is $330,000. During the year, the company had written off
$73,400 of accounts receivable as uncollectible.Required:a. Provide the controller with an
estimate of the bad debts expense for the current period. Be prepared to justify your
recommendation to the controller.b. Comment on the magnitude of the accounts receivable that
were written off as uncollectible during the year.c. Discuss the trade-offs that must be
considered when deciding credit-granting policies.d. Explain why it might be appropriate to use
notes receivable for certain types of customers or very large sales.e. What other steps could
this company take to reduce the risk of not collecting its receivables in the future?View Solution:
Heritage Mill Works sells finished lumber and mouldings to a

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