Question

1. all 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 ½% 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	$1,140,000		$1,050		$1,050
   2nd	1,600,000		2,700		1,250		$1,450
   3rd	2,780,000		12,100		3,500		2,800		$5,800
   4th	3,700,000		18,150				4,150		6,150		$7,850

   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.

   Call Systems Company
   Bad Debt Expense
   Year	Expense Actually Reported	Expense Based on Estimate	Increase (Decrease) in Amount of Expense	Balance of Allowance Account, End of Year
   1st	$	$	$	$
   2nd
   3rd
   4th

   2. Experience during the first four years of operations indicated that the receivables were either collected within two years or had to be written off as uncollectible. Does the estimate of ½% of sales appear to be reasonably close to the actual experience with uncollectible accounts originating during the first two years

Answer 1

1)

	Bad debt expense
Year	Expense actually reported [A]	Expense based on estimate [B]]	Increase/(decrease)in amount of expense [B-A]	Balance of allowance account,end of year
1	1050	1140000*.5%=5700	4650	0+5700-1050= 4650
2	2700	1600000*.5%=8000	5300	4650+8000-2700= 9950
3	12100	2780000*.5%=13900	1800	9950+13900-12100= 11750
4	18150	3700000*.5%=18500	350	11750+18500-18150= 12100

#Balance of allowance account at end of year :Beginning balance+ bad debt expense-amount written off

2)No,The estimate of 1/2% (or .5%) of sales does not appears to be reasonable close to actual experience with uncollectible accounts originating during the first two years.

	Amount written off	Estimated based on sales
1	1050	5700
2	2700	8000