PR 8-3B Compare two methods of accounting for uncollectible receivables ObJ. 3, 4, 5 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 provi- sion 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 follow- ing 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	Â	Â	Â
2nd	14,800,000	30,200	9,000	$21,200	Â	Â
3rd	18,000,000	39,900	3,600	9,300	$27,000	Â
4th	24,000,000	52,600	Â	5,100	12,500	$35,000

Instructions

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

 

 

2.     Experience during the first four years of operations indicated that the receiv- ables 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 experi- ence with uncollectible accounts originating during the first two years? Explain.