Forbes noted that “Fairfield Company does set aside a reserve for bad debts, but last year it began tinkering with its provision for loan losses, reducing it from $6.5 million in one year to $5.39 million the next. It may nor sound like much, but the reserve now covers only 4% of the company’s time share sales, down from 6.5%-even though sales have increased by 30%. But, hey, that’s tomorrow’s problem. Today, Fairfield gets an extra $1 million in earnings.
REQUIRED:
a. Provide several reasons why a company may reduce its bad debt reserve from $6.5 to $5.39 million. Would these reasons seem to be as reasonable when sales have increased by 30 percent?
b. What does Forbes mean in the article by “that’s tomorrow’s problem”?