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compute the total bad debt expense over the five year period under the two methods w 615063

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

Bad debt expense

Account receivable value

Allowance method

Badv debt expense

Account receivable value

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?

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