Uncollectibles: Ignoring an allowance
Fine Linen Service began operations on January 28, 2008. The company does not establish an allowance for doubtful accounts. It simply recognizes a bad debt expense when an account is deemed uncollectible. The company has written off the following items over the past five years:
|
July 6, 2008 |
Wrote off $10,000 as uncollectible from a sale made on March 1, 2008. |
|
Feb. 3, 2009 |
Wrote off $50,000 as uncollectible from a sale made on October 28, 2008. |
|
Mar. 11, 2010 |
Wrote off $25,000 as uncollectible from a sale made on December 20, 2008 ($12,000) and a sale made on May 10, 2008 ($13,000). |
|
Mar. 24, 2010 |
Recovered $5,000 that had been written off on February 3, 2009. It is company policy to credit bad debt expense when an account is recovered. Aug. 8, 2011 Wrote off $75,000 as uncollectible from sales made in 2008 ($20,000), in 2009 ($25,000), and in 2010 ($30,000). |
|
Dec. 2, 2011 |
Wrote off $5,000 as uncollectible from a sale made on April 26, 2011. |
|
Sept. 19, 2012 |
Wrote off $90,000 as uncollectible from sales in 2008 ($5,000), in 2009 ($30,000), in 2010 ($25,000), in 2011 ($20,000), and in 2012 ($10,000). |
Over the period 2008 to 2012, Fine Linen Service realized the following sales and reported the following ending balances in accounts receivable.
|
Sales |
Accounts Receivable |
|
|
2008 |
$1,000,000 |
$950,000 |
|
2009 |
975,000 |
900,000 |
|
2010 |
1,025,000 |
1,200,000 |
|
2011 |
1,032,000 |
1,175,000 |
|
2012 |
990,000 |
1,095,000 |
At the beginning of operations, a consultant had informed Fine Linen Service that the company should expect not to collect 8 percent of total sales.
REQUIRED:
a. List the bad debt expense 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:
|
2008 |
2009 |
2010 |
2011 |
2012 |
|
|
Cirrent method |
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|
Bad debt expense |
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Account receivable value |
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Allowance method |
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Badv debt expense |
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Account receivable value |
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b. Compute the total bad debt expense over the five-year period under the two methods. Why is the allowance method preferred to Fine Linen”s current method?