The Glass House a glass and china store sells nearly
The Glass House, a glass and china store, sells nearly half its merchandise on credit. During the past four years, the following data were developed for credit sales and losses from uncollectible accounts:
1. Calculate the loss rate for each year from 2008 through 2011.
2. Determine whether there appears to be a significant change in the loss rate over time.
3. Conceptual Connection: If credit sales for 2012 are $400,000, determine what loss rate you would recommend to estimate bad debts. (Note: Round answers to three decimal places.)
4. Using the rate you recommend, record bad debt expense for 2012.
5. Conceptual Connection: Assume that the increase in The Glass House’s sales in 2012 was largely due to granting credit to customers who would have been denied credit in previous years. How would this change your answer to part 4? Describe a legitimate business reason why The Glass House would adopt more lenient credit terms.
6. Using the data from 2008 through 2011, estimate the increase in income from operations in total for each of those four years assuming (a) the average gross margin is 25% and (b) 50% of the sales would have been lost if no credit was granted.
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