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 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 1 2 3 4 1 $12,500,000 $18,000 $18,000 2 14,800,000 30,200 9,000 $21,200 3 18,000,000 39,900 3,600 9,300 $27,000 4 24,000,000 52,600 5,100 12,500 $35,000 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 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.

AppendixLO1