Question: Fine Linen Service began operations on January 28 2011 The

Fine Linen Service began operations on January 28, 2011. 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, 2011 Wrote off $10,000 as uncollectible from a sale made on March 1, 2011.
Feb. 3, 2012 Wrote off $50,000 as uncollectible from a sale made on October 28, 2011.
Mar. 11, 2013 Wrote off $25,000 as uncollectible from a sale made on December 20, 2011 ($12,000) and a sale made on May 10, 2011 ($13,000).
Mar. 24, 2013 Recovered $5,000 that had been written off on February 3, 2012. It is company policy to credit bad debt expense when an account is recovered.
Aug. 8, 2014 Wrote off $75,000 as uncollectible from sales made in 2011 ($20,000), in 2012 ($25,000), and in 2013 ($30,000).
Dec. 2, 2014 Wrote off $5,000 as uncollectible from a sale made on April 26, 2014.
Sept. 19, 2015 Wrote off $90,000 as uncollectible from sales in 2011 ($5,000), in 2012 ($30,000), in 2013 ($25,000), in 2014 ($20,000), and in 2015 ($10,000).
Over the period 2011 to 2015, Fine Linen Service realized the following sales and reported the following ending balances in accounts receivable.


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:


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 currentmethod?


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  • CreatedAugust 19, 2014
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