Call Systems Company, a telephone service and supply company, has just completed

Question

Call Systems Company, a telephone service and supply company, has just completed its fourth year of operations. The direct write-off method of recording bad debt expense has been used during the entire period. Because of substantial increases in sales volume and the amount of uncollectible accounts, the company is considering changing to the allowance method. Information is requested as to the effect that an annual provision of 1% of sales would have had on the amount of bad debt expense reported for each of the past four years. It is also considered desirable to know what the balance of Allowance for Doubtful Accounts would have been at the end of each year. The following data have been obtained from the accounts:

Year

Sales

Uncollectible Accounts Written Off

Years of Origin of Accounts Receivable

Written Off as Uncollectible

(1st)

(2nd)

(3rd)

(4th)

Year

Sales

Uncollectible Accounts Written Off

Years of Origin of Accounts Receivable

Written Off as Uncollectible

(1st)

(2nd)

(3rd)

(4th)

1st $ 829,400 $ 4,870 $4,870 2nd 1,233,300 9,280 2,660 $6,620 3rd 1,484,100 13,400 1,330 3,800 $8,270 4th 2,103,200 16,290 1,340 3,860 $11,090

Explanation / Answer

1.

Schedule of bad debt expense

1,340

2. Schedule of comparison of estimated uncollectible account with actual uncollected account

Estimation is 1%

Actual is

thus,

from above it appears that estimate of 1% of sales appear to be reasonably close to the actual experience with uncollectible accounts originating during the first two years.

Year Sales Uncollectible accounts written off Years of origin of accounts receivable Total Bad debt expenses Written off as uncollectible (1st) (2nd) (3rd) (4th) 1st           8,29,400                          4,870             4,870                -                -                  -                       4,870 2nd        12,33,300                          9,280             2,660 6,620 -                  -                       9,280 3rd        14,84,100                        13,400             1,330 3,800 8,270                  -                     13,400 4th        21,03,200                        16,290                    -

1,340

3,860 11,090 16,290 8,860 11,760 12,130 11,090 -

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