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:

					Year of Origin of Accounts Receivable Written Off as Uncollectible
Year	Sales		Uncollectible Accounts Written Off		1st		2nd		3rd		4th
1st	$1,160,000		$1,050		$1,050
2nd	1,690,000		2,850		1,350		$1,500
3rd	2,820,000		12,250		3,550		2,800		$5,900
4th	3,340,000		16,350				3,750		5,550		$7,050

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
Bad Debt 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
4th

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?

Answer 1

1.

Year	Expense Actually Reported	Expense Based on Estimate	Increase (Decrease) in Amount of Expense	Balance of allowance account
1	$            1,050	$             5,800	$                 4,750	$                      4,750
2	$            2,850	$             8,450	$                 5,600	$                   10,350
3	$         12,250	$           14,100	$                 1,850	$                   12,200
4	$         16,350	$           16,700	$                    350	$                   12,550

2.
Yes it can be said that estimate of 1/2% is way is close to the actual experience with uncollectible accounts since, accounts written off originating in Year 1 amounts ot $5950 which is close to $5800 and similarly accounts written off originating from Year 2 is $8050 which is also close to $8450.