Fine Linen Service began operations on January 28, 1993. The company does not establish an allowance for bad debts. It simply recognizes a bad debt charge when an account is deemed uncollectible. Over the past five years the company has written off the following items. July 6,1993 Feb. 3,1994 Mar. 11,1995 Mar. 24,1995 Aug. 8,1996 Dec. 2,1996 Sep. 19,1997 Wrote off $10,000 as uncollectible from a sale made on March 1,1993. Wrote off $50,000 as uncollectible from a sale made on October 28,1993. Wrote off $25,000 as uncollectible from a sale made on December 20,1993 ($12,000) and a sale made on May 10,1994 ($13,000). Recovered $5,000 that had been written off on February 3,1994. It is company policy to credit Bad Debt Charge when an account is recovered. Wrote off $75,000 as uncollectible from sales made in 1993 ($20,000), in 1994 ($25,000), and in 1995 ($30,000). Wrote off $5,000 as uncollectible from a sale made on April 26, 1996. Wrote off $90,000 as uncollectible from sales in 1993 ($5,000), in 1994 ($30,000), in 1995 ($25,000), in 1996 ($20,000), and in 1997 ($10,000). ADDITIONAL INFORMATION

a. Over the period 1993 to 1997, Fine Linen Service realized the following sales and reported the following ending balances in accounts receivable. Accounts Sales Receivable

b. 1993 $1,000,000 $ 950,000 1994 975,000 900,000 1995 1,025,000 1,200,000 1996 1,032,000 1,175,000 1997 990,000 1,095,000 At the beginning of operations, consultant had informed Fine Linen Service that the company should expect not to collect 8 percent of total sales. 304 Part 3 Assets: A Closer Look REQUIRED:

a. List the bad debt charge and the balance sheet value of Accounts Receivable for each year over the five-year period under both Fine Linen’s current method and the allowance method. Use the following format. 1993 1994 1 995 1996 1 997 Current method: Bad debt charge Accounts receivable value Allowance method: Bad debt charge Accounts receivable value

b. Compute the total bad debt charge over the five-year period under the two methods. Why is the allowance method preferred to Fine Linen's current method?