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?

Transcribed Image Text:

SalesAccounts Receivable 2011 $1,000,000 2012 2013 1,025,000 2014 1,032,000 2015 $950,000 900,000 1,200,000 1,175,000 1,095,000 975,000 990,000 20112012 2013 2014 2015 Current method: Bad debt expense Accounts receivable value Allowance method: Bad debt expense Accounts receivable value