Reference no: EM132367956
Question
Two members of the management staff of Practical Products Ltd were debating the merits of the percentage of net credit sales method and the ageing of debtors method for determining the allowance for doubtful debts at year-end.
Lance held the view that 'during times of economic stability when credit sales and receivables do not fluctuate, the percentage of net sales method is to be preferred due to its simplicity of calculation'. He did concede that perhaps the ageing method could be better during periods when the business was experiencing rapid growth in credit sales.
Phillip, on the other hand, argued that 'the ageing method was the better choice in all economic conditions whether credit sales and receivables were steady, rising, or falling', and maintained that simplicity of calculation should not be the basis for selecting a particular method.
a) Do you agree with Lance that the percentage of net credit sales method should be preferred because of its simplicity of calculation? Explain why or why not.
b) Why do you think that Lance concedes that the ageing method might be better in times when credit sales and receivables are increasing? Explain.
c) Is there any validity in Phillip's argument that the ageing method would be better in all economic conditions (stable/increasing/decreasing credit sales)? Explain your stance.
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