Please explain the answer. Widwoman Sales Company has just completed its fourth
ID: 2599162 • Letter: P
Question
Please explain the answer. Widwoman Sales Company has just completed its fourth year of operations. The DIRECT WRITE-OFF METHOD of recording bad debt expense has been employed during the entire period. Because of substantial increases in sales volume and the amount of bad debts, the firm is considering the possibility of changing to the ALLOWANCE METHOD Information is required as to the effect that an annual provision of ½ of 1% 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 the balance of the 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 as Uncollectible 904 Accounts Receivable Written Of Uncollectible Accounts YEAR 400,000 600,000 700,000 800,000 250 1600 200 250 nd rd th 600 2,000 300 31 2,800 600 3,300 2,300 700 INSTRUCTIONS: 1. Assemble the desired data, using the following columnar captions:Explanation / Answer
YEAR EXPENSES ACTUALLY REPORTED EXPENSE BASED ON ESTIMATES INCREASE IN AMOUNT OF EXPENSE BALANCE OF ALLOWANCE ACCOUNT END OF YEAR 1 250 2,000 (1,750) (1,750) 2 2,200 3,000 (800) (2,550) 3 2,800 3,500 (700) (3,250) 4 3,300 4,000 (700) (3,950) No, the estimate of management of making provision of 1/2 of 1% on sales is not realistic. In the first year, the actual bad debts were 0.0625% and in the second year these were 0.35% of sales. The provision for first two years was excess by $ 2250 on total sales of $ 1,000,000 ( aggregate of both the years) which is 0.225%