Digital Depot Company, which operates a chain of 40 electronics supply stores, has just completed its fourth year of operations

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 ¼% 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 $12,500,000 $18,000 $18,000
2nd 14,800,000 30,200 9,000 $21,200
3rd 18,000,000 39,900 3,600 9,300 $27,000
4th 24,000,000 52,600 5,100 12,500 $35,000

Instructions

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

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Bad Debt Expense
Year
Expense
Actually
Reported
Expense
Based on
Estimate
Increase
(Decrease)
in Amount
of Expense
Balance of
Allowance Account,
End of Year

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 ¼% of sales appear to be reasonably close to the actual experience with uncollectible accounts originating during the first two years? Explain.


Answer:

1. 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 $18,000 $31,250 $13,250 $13,250
2nd 30,200 37,000 6,800 20,050
3rd 39,900 45,000 5,100 25,150
4th 52,600 60,000 7,400 32,550



2. Yes. The actual write-offs of accounts originating in the first two years are reasonably close to the expense that would have been charged to those years on the basis of 1/4% of sales. The total write-off of receivables originating 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).