Question

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Amdahl Corporation manufactures large-scale, high performance computer systems. In a recent annual report, the balance sheet included the following information (dollars in thousands):

Current Year			Previous Year
Current assets:
Receivables, net of allowances of $5,042 and $6,590 in the previous year	$	504,944		$	580,640

In addition, the income statement reported sales revenue of $2,158,755 ($ in thousands) for the current year. All sales are made on a credit basis. The statement of cash flows indicates that cash collected from customers during the current year was $2,230,065 ($ in thousands). There were no recoveries of accounts receivable previously written off.

Required:
 
1. Compute the following (dollar amounts in thousands):
a. The amount of uncollectibles written off by Amdahl during the current year.
b. The amount of bad debt expense that Amdahl would include in its income statement for the current year.
c. The approximate percentage that Amdahl used to estimate uncollectibles for the current year, assuming that it uses the income statement approach.
 
2. Suppose that Amdahl had used the direct write-off method to account for uncollectibles. Compute the following (dollars in thousands):
a. The accounts receivable information that would be included in the year-end balance sheet.
b. The amount of bad debt expense that Amdahl would include in its income statement for the current year.
 

Answer 1

“The income statement approach of estimating bad debt expenses is the amount of expenses that will not be collected as percentage of sales. The formula for calculating the bad debt expenses will be:

Bad Debt Expense=Net Sales (Total Credit) ×Percentage estimated as uncollectible”.

“The direct debit method approach of estimating uncollectible is when it is directly written from the account receivables instead of creating an allowance in the income statement.”

1.

a. Calculation of the amount of uncollectible written off by Amdahl during the current year:

Hence the amount of uncollectible written off in the current year is $5,934.

b. Calculation of the amount of bad debt expenses that would be included in the income statement of the current year:

Hence the amount of bad debt expense for the year is $4,386.

c. Calculation of approximate percentage that would be included in income statement in current year:

Hence the percentage of bad debt to credit sales that would be included in the income statement in current year is 0.2%.

2.

a. Calculation of the accounts receivable by the direct method to be included in the year-end balance sheet:

The amount of accounts receivable:

.

Hence the amount of account receivables at year end is $509,986.

b. Calculation of the amount of bad debt expenses that would be included in the income statement:

The amount of bad debt expenses that would be included in the income statement would be equal to the amount of actual receivables written off is $5,934.