ACC 201 Module 6 Receivables and Long-Term Assets Short Paper example

Two Estimates on One Balance Sheet: Depreciating Floor-Care Equipment and Allowing for Bad Debts at a Composite Commercial Cleaning Company

[Student Name]

Southern New Hampshire University

ACC 201: Financial Accounting

Module Six Short Paper

[Instructor Name]

[Date]

The organization, setting and figures below are a composite written as a model document. No real employer, client, colleague or patient is described.

Two Estimates on One Balance Sheet: Depreciating Floor-Care Equipment and Allowing for Bad Debts at a Composite Commercial Cleaning Company

The Company

Brightline Commercial Cleaning is a composite company that cleans offices, schools and medical clinics under monthly contracts, billing customers at the end of each month on 30-day terms. On January 2, 2025, it bought a fleet of ride-on floor scrubbers and burnishers for 48,000 dollars, expected to last five years, to have a combined salvage value of 6,000 dollars and to run about 12,000 hours over their lives. At December 31, 2025, customers owed Brightline 186,000 dollars. Both the equipment and the receivables appear on the balance sheet at amounts that depend on estimates, and both estimates flow into the year's expenses (Franklin et al., 2019).

Depreciation Under Three Methods

The depreciable amount, cost minus salvage value, is 42,000 dollars under every method. Straight-line depreciation spreads that amount evenly: 42,000 dollars divided by five years is 8,400 dollars a year. The double-declining-balance method applies twice the straight-line rate, 40 percent, to whatever book value remains when each year opens; salvage value is left out of that multiplication, though the asset may never be written down past it. The first year's expense is 40 percent of 48,000 dollars, or 19,200 dollars. The units-of-activity method charges a rate per hour of use: 42,000 dollars divided by 12,000 hours is 3.50 dollars an hour, and because the machines ran 2,900 hours in 2025, the first year's expense is 10,150 dollars.

Table 1

Depreciation Schedules for Floor-Care Equipment Costing $48,000

Note. Composite figures. Double-declining amounts are rounded to the dollar; the 2029 expense is limited so that book value does not fall below the $6,000 salvage value.

Table 1 shows the full straight-line and double-declining-balance schedules.

Choosing and Recording Depreciation

Brightline's floor machines wear out with use rather than with time, and some months see far more hours than others because schools are deep-cleaned during summer break. The units-of-activity method therefore matches expense to the way the machines are consumed better than either time-based method. Using it, the December 31, 2025 adjusting entry debits Depreciation Expense and credits Accumulated Depreciation, Equipment, for 10,150 dollars. The equipment remains on the balance sheet at its 48,000 dollar cost, with accumulated depreciation shown as a contra account, so the book value is 37,850 dollars. For tax purposes Brightline may use the Modified Accelerated Cost Recovery System, which follows its own recovery periods and conventions, so its tax depreciation will differ from the figures above (Internal Revenue Service [IRS], 2024).

How the Choice Moves the Statements

The three methods tell the same five-year story in different chapters. In 2025, straight-line would report 8,400 dollars of depreciation, units-of-activity 10,150 dollars and double-declining-balance 19,200 dollars, so Brightline's operating income could differ by more than 10,000 dollars depending on the method, with no difference in how the machines were actually used or how much cash the company generated. Depreciation is a noncash expense; the cash left the business on January 2 when the equipment was bought. What the method changes is the timing of expense on the income statement and the book value on the balance sheet. That is why a lender comparing Brightline with a competitor should check which methods each company uses before comparing margins, and why the notes to the financial statements must disclose the methods and useful lives. It is also why a sudden change of method deserves scrutiny: switching from an accelerated method to straight-line in a weak year would raise reported profit without any change in the business.

Estimating Uncollectible Accounts

Some of the 186,000 dollars customers owe will never be collected. Under the allowance method, Brightline estimates that amount at year end and records it as an expense in the same year as the revenue that created the receivables, rather than waiting until a customer fails. Current accounting standards require that the estimate reflect the credit losses the company expects, drawing on its own collection history, the present state of its customers and supportable views of the near future (Financial Accounting Standards Board [FASB], 2016). Brightline's collection history supports the loss rates by age category shown in Table 2.

Table 2

Aging Schedule and Required Allowance for Uncollectible Accounts, December 31, 2025

Note. Composite figures based on the company's collection history.

Recording Bad Debts and a Write-Off

The aging schedule shows that the allowance should have a balance of 6,920 dollars. Before adjustment, the allowance already has a credit balance of 1,450 dollars left from earlier estimates, so the adjusting entry records only the difference: a debit to Bad Debt Expense and a credit to Allowance for Doubtful Accounts of 5,470 dollars. On the balance sheet, receivables are reported at 186,000 dollars less the 6,920 dollar allowance, a net realizable value of 179,080 dollars, the amount Brightline expects to collect.

In February 2026, a dental clinic that owed 1,300 dollars closes and cannot pay. Brightline writes off the account by debiting the allowance and crediting Accounts Receivable for 1,300 dollars. The write-off does not create a new expense, because the loss was already estimated in 2025, and it does not change net receivables, since both the receivable and the allowance fall by the same amount. Under the allowance method, the expense belongs to the year of the sale, not the year the customer disappears.

Why Both Are Judgments

Depreciation and bad debts share an important feature: neither can be measured from a document. Both rest on estimates, a useful life and salvage value in one case, loss rates in the other, and both change reported profit. Had Brightline chosen double-declining balance, its 2025 depreciation expense would have been 9,050 dollars higher than under units-of-activity; had it used loss rates half as large, its bad debt expense would have been about 3,460 dollars lower. Because these choices can move income, standards require that methods be applied consistently and that changes be disclosed and justified. The responsible approach is to document the basis for each estimate, compare estimates with actual results each year and revise them when experience shows they were wrong, rather than when a revision would make results look better.

References

Financial Accounting Standards Board. (2016). Financial instruments, credit losses (Topic 326): Measurement of credit losses on financial instruments (Accounting Standards Update No. 2016-13). FASB.

Franklin, M., Graybeal, P., & Cooper, D. (2019). Principles of accounting, volume 1: Financial accounting. OpenStax. https://openstax.org/details/books/principles-financial-accounting

Internal Revenue Service. (2024). How to depreciate property (Publication 946). https://www.irs.gov/publications/p946