The Hines Corporation is in the process of closing its books for the year. The company has been growing at an unexpected rate. The chief accountant at the Hines Corporation is currently determining the applicable percentage for the allowance for bad debts and believes it should be based on 2% of net credit sales. The president of the company, Jay Hines, has expressed concerns about living up to the expectations established by the growth in the current year. The president approached the controller and has made a request to increase the allowance for bad debts to 5% of net credit sales with the expectation that the lower net income will decrease the pressure to perform in future years.
a. What factors should one consider when determining the applicable percentage to apply when using the income statement or balance sheet approach?
b. Should the controller be concerned with the company's growth rate when determining the allowance for bad debts? Explain.