Kelly s Collectibles sells nearly half its merchandise on

credit During #2354

Kelly s Collectibles sells nearly half its merchandise on credit During

Kelly's Collectibles sells nearly half its merchandise on credit. During the past 4 years, the
following data were developed for credit sales and losses from uncollectible accounts:

* Losses from uncollectible accounts are the actual losses related to sales of that year (rather
than write-offs of that year).

Required:

1. Calculate the loss rate for each year from 2016 through 2019.

2. Determine if there appears to be a significant change in the loss rate over time.

3. If credit sales for 2020 are $182,000, explain what loss rate you would recommend to
estimate bad debts.

4. Using the rate you recommend, record bad debt expense for 2020.

5. Assume that the increase in Kelly's sales in 2020 was largely due to granting credit to
customers who would have been denied credit in previous years. How would this change your
answer to Requirement 4? Describe a legitimate business reason why Kelly's would adopt more
lenient credit terms.

6. Using the data from 2016 through 2019, estimate the increase in income from operations in
total for those 4 years assuming

(a) The average gross margin is 45% and

(b) 20% of the sales would have been lost if no credit was granted (round to nearest dollar).

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