finacial accounting 458883

SEK Company sells office equipment and supplies to many organizations in the city

and surrounding area on contract terms of 2/10, n/30. In the past, over 75% of the credit customers

have taken advantage of the discount by paying within 10 days of the invoice date.

The number of customers taking the full 30 days to pay has increased within the last year.

Current indications are that less than 60% of the customers are now taking the discount. Bad

debts a percentage of gross credit sales have risen from the 2.5% provided in past years to

about 4.5% in the current year.

The company’s Finance Committee has requested more information on the collections of

accounts receivable. The controller responded to this request with the report reproduced below.

SEK COMPANY

Accounts Receivable Collections

May 31, 2011

The fact that some credit accounts will prove uncollectible is normal. Annual bad debts writeoffs

have been 2.5% of gross credit sales over the past 5 years. During the last fiscal year,

this percentage increased to slightly less than 4.5%. The current Accounts Receivable

balance is $1,400,000. The condition of this balance in terms of age and probability of

collection is as follows.

FINANCIAL REPORTING AND ANALYSIS

B R O A D E N I N G Y O U R P E R S P E C T I V E

Proportion of Total Age Categories Probability of Collection

62% not yet due 98%

20% less than 30 days past due 96%

9% 30 to 60 days past due 94%

5% 61 to 120 days past due 91%

21/2% 121 to 180 days past due 75%

11/2% over 180 days past due 30%

The Allowance for Doubtful Accounts had a credit balance of $29,500 on June 1, 2010. SEK has

provided for a monthly bad debts expense accrual during the current fiscal year based on the assumption

that 4.5% of gross credit sales will be uncollectible.Total gross credit sales for the 2010’11

fiscal year amounted to $2,900,000. Write-offs of bad accounts during the year totaled $102,000.

In a recessionary environment with tight credit and high interest rates:

(1) Identify steps SEK Company might consider to improve the accounts receivable situation.

(2) Then evaluate each step identified in terms of the risks and costs involved.