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 $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. Enter a decrease in the amount of expense as a negative number and all other amounts as positive numbers. 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?

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

Year

Sales
Uncollectible Accounts
Written Off

1st

2nd

3rd

4th
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. Enter a decrease in the amount of expense as a negative number and all other amounts as positive numbers.
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?

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