Compare Two Methods of Accounting for Uncollectible Receivables Call Systems Com

Question

Compare Two Methods of Accounting for Uncollectible Receivables

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 ½% 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:

Required:

1. Assemble the desired data. Enter a decrease in the amount of expense as a negative number and all other amounts as positive numbers.

2. Experience during the first four years of operations indicated that the receivables were either collected within two years or had to be written off as uncollectible. Does the estimate of ½% of sales appear to be reasonably close to the actual experience with uncollectible accounts originating during the first two years?

Year of Origin of Accounts Receivable Written Off as Uncollectible Year Sales Uncollectible Accounts Written Off 1st 2nd 3rd 4th 1st $1,270,000 $1,150 $1,150 2nd 1,600,000 2,700 1,250 $1,450 3rd 2,700,000 11,750 3,400 2,700 $5,650 4th 3,250,000 15,950 3,650 5,400 $6,900

Explanation / Answer

2)No ,the estimate of ½% of sales appear to be reasonably close to the actual experience with uncollectible accounts originating during the first two years as the difference during the actual amount and estimated amount is high during the first two years [5200 & 5300]

Schedule of Bad Debt Expense Year Expense Actually Reported Expense Based on Estimate Increase (Decrease) in Amount of Expense Balance of Allowance Account, End of Year 1 1150 1270000*.5%= 6350 5200 5200 2 2700 1600000*.5%=8000 5300      [8000-2700] 5300 3 11750 2700000*.5%= 13500 1750 1750 4 15950 3250000*.5%=16250 300 300

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