National Telecommunication (NT), a provider of telecommunication

National Telecommunication (NT), a provider of telecommunication services to businesses, has been in existence for a few years. All of NT’s sales are on credit. This year, NT expects to increase net income from the previous year by 5%. However, this growth may not be sustainable due to new and advanced technology used by competitors in the industry.

The industry average for percentage used for allowance for doubtful debt is between 1% and 3%.
The Chief Executive Officer (CEO) suggests that you (the controller) increase the company’s percentage used for allowance for doubtful debt from 1.5% to 3% of accounts receivables. That way, the percentage used for allowance for doubtful debt is still within acceptable industry range. The CEO also argues that with the change, this year’s net income will be lower and will show a modest 2% increase from previous year. This revised growth rate will be more in line with expected future growth rate.

1.) Do you agree with the CEO regarding the change in the allowance for doubtful debt? Why or why not?

2.) Are you going to recalculate the allowance for doubtful debt and revise net income? Why or why not?

3.) What is the proper accounting treatment for the growth rate in estimating the allowance for doubtful debt? Explain your answer.