PR 8-3B 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 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	3nd	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:

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