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To: Controller
From: Hans Christian Imperial
Re: Percentage of accounts receivable balance vs. percentage-of-sales
Background
The credit policy of Gabitan, Inc. has been changed several months ago. Since then,
there has been a dramatic increase in the number of accounts receivable that are past due.
The company calculates the allowance for doubtful accounts based on the percentage of
the ending receivables balance and you think that it is more appropriate to use a
percentage-of-sales method to calculate the allowance for doubtful accounts.
Purpose
The objective of this memorandum is to analyze the effect of the change in the
credit policy of the firm and the existing method in calculating the allowance for doubtful
accounts, and to give recommendation whether to change the method in calculating the
allowance of doubtful accounts to present a more accurate and appropriate figure in the
allowance for doubtful accounts.