Answer Happy

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 12% 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 Year Sales Written Off 1st 2nd 3rd 4th 1 st $1,120,000 $1,000 $1,000 2nd 1,820,000 3,100 1,450 $1,650 3rd 2,580,000 11,200 3,250 2,600 $5,350 4th 3,140,000 15,400 3,550 5,250 $6,600

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 Expense Expense Actually Based on Year Reported Estimate Increase Balance (Decrease) of Allowance in Amount Account, of Expense 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 12% of sales appear to be reasonably close to the actual experience with uncollectible accounts originating during the first two years?