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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

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:

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Instructions

1.    Assemble the desired data, using the following column headings:

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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? Explain.

(1)

To determine

Direct write-off method:

This method does not make allowance or estimation for uncollectible accounts, instead this method directly write-off the actual uncollectible accounts by debiting bad debt expense and by crediting accounts receivable. Under this method, accounts would be written off only when the receivables from a customer remain uncollectible.

Allowance method:

It is a method for accounting bad debt expense, where amount of uncollectible accounts receivables are estimated and recorded at the end of particular period. Under this method, bad debts expenses are estimated and recorded prior to the occurrence of actual bad debt, in compliance with matching principle by using the allowance for doubtful account.

To assemble: The desired data, for the given headings.

Explanation

Assemble the desired data, for the given headings.

Table (1)

Uncollectible Accounts written off would have been recorded as bad debts expense under direct write off method. Hence expense actually reported column is filled with amount of uncollectible Accounts written off for each year.

Expense based on estimate is calculated by multiplying sales with 1%. Then, expense actually reported is deducted from the expense based on estimate to determine the increase amount of expense...

(2)

To determine

To identify and explain: Whether the estimate of 1% of sales is reasonably closer to the actual experience with uncollectible accounts originating during the first two years.

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