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
Year Sales Uncollectible Accounts Written Off 1st 2nd 3rd 4th
1st $1,150,000 $1,050 $1,050
2nd 1,740,000 2,950 1,400 $1,550
3rd 2,730,000 11,900 3,450 2,750 $5,700
4th 3,470,000 17,000 3,900 5,800 $7,300
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?