Question

Compare Two Methods of Accounting for Uncollectible Receivables Digital Depot Company, which operates a chain of 40 electronics supply stores, 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 firm is considering changing to the allowance method. Information is requested as to the effect that an annual provision of 14% 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 Written Year Sales 1st 2nd 3rd 4th Off $18,000 9,000 1st 2nd 3rd 4th $12,500,000 14,800,000 18,000,000 24,000,000 $18,000 30,200 39,900 52,600 3,600 $21,200 9,300 5,100 $27,000 12,500 $35,000 Required: 1. Assemble the desired data. Enter all amounts as positive numbers. Digital Depot Company Bad Debt Expense Expense Based on Estimate Increase (Decrease) in Amount of Expense Balance of Allowance Account, End of Year Year 1st Expense Actually Reported $ 2nd

Answer 1

Ques 1
Year	Expense Actually reported	Expense Based on Estimated	Increase / (Decrease) in Amount of Expense	Balance of Allowance Account End of Year
1	18000	31250	13250	13250
2	30200	37000	6800	20050
3	39900	45000	5100	25150
4	52600	60000	7400	32550
Working
	Sales	Estimated	Estimated Bad expense
	12500000	1/4%	31250
	14800000	1/4%	37000
	18000000	1/4%	45000
	24000000	1/4%	60000
Ques 2
Yes. . As we can see in the first year amounted to $30,600 ($18,000 + $9,000 + $3,600), as compared with bad debt expense based on the percentage of sales, of $31,250 ($12,500,000 × 0.0025). For the second year, the comparable amounts were $35,600 ($21,200 + $9,300 + $5,100) and $37,000 ($14,800,000 × 0.0025).