Question

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 Sales Uncollectible Accounts Written Off receivable written
1st $ 900,000 $4,500 $4,500
2nd 1,250,000 9,600 3,000 $6,600
3rd 1,500,000 12,800 1,000 3,700 $8,100
4th 2,200,000 16,550 1,500 4,300 $10,750

Required:

1. Assemble the desired data to prepare a schedule of bad debt expense. Enter all amounts as positive numbers.

Answer 1

Answer:

Year        Sales                              Written Off  Accounts        

                                                                   Year of Origin  

                                       Uncollectible       1                   2               3                            

1st        $ 900,000             $4,500        $4,500

2nd      1,250,000              9,600           3,000         $6,600

3rd        1,500,000           12,800           1,000            3,700           $8,100

4th          2,200,000        16,550             1,500          4,300           $10,750

Year            Bad Debt Expense                              

         Expense  Actually     Expense        Increase      Balance of Allowance      

               Reported             Estimated      (Decrease)    Account Year End

1)           $4500                   $ 9000           $4500              $ 4500

2)           $ 9600                   $12500          1900                 $ 6400

3)           $12800                  15000             2200               $ 8600

4)            16550                    22000            5450               14,050

Explanation:

The actual write off accounts originating in the  years were

1)  ( $ 4500+ $ 3000+ $ 1000+ $ 1500)= $ 9500

2)  ( $ 6600+ 3700+ 4300) = $ 14600

3) ($ 8100+ $ 10,750)= $ 18,850.

Only the first year written off accounts are close to expense if it would have been calculated to 1% of sales ( 1% of $ 900,000) = $ 9000