Instructions Digital Depot Company, which operates a chain of 40 electronics sup
ID: 2496630 • Letter: I
Question
Instructions
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:
Years of Origin of Accounts Receivable
Written Off as Uncollectible
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?
Schedule of Bad Debt Expense
Assemble the desired data to prepare a schedule of bad debt expense. Enter decreases as negative numbers using a minus sign.
Digital Depot Company
Schedule of Bad Debt Expense
1
Year
Expense Actually Reported
Expense Based on Estimate
Increase (Decrease) in Amount of Expense
Balance of Allowance Account, End of Year
2
1st
3
2nd
4
3rd
5
4th
?
Year Sales Uncollectible Accounts Written OffYears of Origin of Accounts Receivable
Written Off as Uncollectible
(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 $35,000Explanation / Answer
1.
Working:
Calculation of estimation of bad debts expense:
Year 1 = $12,500,000*1/4%
= $12,500,000*0.25%
= $12,500,000*0.0025
= $31,250
Year 2 = $14,800,000*0.0025
= $37,000
Year 3 = $18,000,000*0.0025
= $45,000
Year 4 = $24,000,000*0.0025
= $60,000
2.
Total expense under direct write off method:
Year 1 = $18,000 + $9,000 + $3,600
= $30,600
Year 2 = $21,200 + $9,300 + $5,100
= $35,600
Year 3 = $27,000 + $12,500
= $39,500
Year 4 = 35,000
The estimate of ¼% of sales is not appear to be reasonably to close to the actual experience with uncollectible accounts.
Year Expense actually reported ($) (a) Expense based on estimate ($) (b) Increase (decrease) in amount of expense ($) (c =b-a) Balance of allowance account at the end of the year 1 18,000 31,250 13,250 13,250 2 30,200 37,000 6,800 20,050 3 39,900 45,000 5,100 25,150 4 52,600 60,000 7,400 32,550