Question

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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