Compare Two Methods of Accounting for Uncollectible Receivables Cyber Space Company, which operates a chain of 65 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 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 Sales Accounts Receivable Written Off as Uncollectible 1 2 3 4 1. $2,300,000 $5,000 $5,000 2. 4,750,000 $9,000 $4,000 $5,000 3. 9,000,000 $23,000 $2,000 $12,000 $9,000 4. 9,600,000 $37,500 $5,500 $14,500 $17,500 Instructions: 1. Assemble the desired data, using the following column headings: Bad Debt Expense Year Expense Actually Reported Expense Based on Estimate Increase (Decrease) in Amount of Expense Balance of Allowance Account, End of Year 1 $ $ $ $ 2 $ $ $ $ 3 $ $ $ $ 4 $ $ $ $ 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? _______ (yes or no)
Bad Debts
At the end of the accounting period, a financial statement is prepared by every company, then at that time while preparing the financial statement, the company determines among its total receivable amount how much portion of receivables is collected by the company during that accounting period.
Accounts Receivable
The word “account receivable” means the payment is yet to be made for the work that is already done. Generally, each and every business sells its goods and services either in cash or in credit. So, when the goods are sold on credit account receivable arise which means the company is going to get the payment from its customer to whom the goods are sold on credit. Usually, the credit period may be for a very short period of time and in some rare cases it takes a year.
Compare Two Methods of Accounting for Uncollectible Receivables
Cyber Space Company, which operates a chain of 65 electronics supply stores, has just completed its fourth year of operations. The direct write-off method of recording
| Year | Sales | Accounts Receivable Written Off as Uncollectible |
1 | 2 | 3 | 4 |
| 1. | $2,300,000 | $5,000 | $5,000 | |||
| 2. | 4,750,000 | $9,000 | $4,000 | $5,000 | ||
| 3. | 9,000,000 | $23,000 | $2,000 | $12,000 | $9,000 | |
| 4. | 9,600,000 | $37,500 | $5,500 | $14,500 | $17,500 |
Instructions:
1. Assemble the desired data, using the following column headings:
| Bad Debt Expense | ||||
| Year | Expense Actually Reported | Expense Based on Estimate | Increase (Decrease) in Amount of Expense | Balance of Allowance Account, End of Year |
| 1 | $ | $ | $ | $ |
| 2 | $ | $ | $ | $ |
| 3 | $ | $ | $ | $ |
| 4 | $ | $ | $ | $ |
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?
_______ (yes or no)
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