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 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 of Origin of Accounts Receivable Written off as Uncollectible Uncollectible Accounts Written Year Sales 1st 2nd 3rd 4th Off st $900,000 2nd 1,250,000 3rd 1,500,000 4th 2,200,000 $4,500 9,600 12,800 16,550 $4,500 3,000 L,000 $5,600 3,700 1,500 $8,100 4,300 $10,750 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. Call Systems Company Schedule of Bad Dcbt Expense Year Expense Actually Reported Expense Based on Estimate Increase (Decrease) in Amount of Expense Balance of Allowance Account, End of Year 1st 2nd 3rd 1th 2. Experience during the first four years of operations indicated that the receivables either were collected within two years or had to be written off as uncollectible. Does the estimate of 1% of sales appear to be reasonably close to the actual experience with uncollectible accounts originating during the first two years?

Explanation / Answer

Call Systems Company Schedule of Bad Debt Expense Year Expense Actually Reported B Expense Based on Estimate A Increase (Decrease) in Amount of Expense C=A-B Balance of Allowance Account, End of Year C+net year bal 1st 4500 9000 4500 4500 2nd 9600 12500 2900 7400 3rd 12800 15000 2200 9600 4th 16550 22000 5450 15050 ans 2 Yes The actual written off of the accounts which originated in first two years is close to the basis of 1% of sales. Total write off receivable for 1st year (4500+3000+1000)=$8500 and as per % based on sales is $9000. For second year=(6600+3700+1500) 11800 and as per % based on sales is $12600. Hence its close

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