Last thing we're going to do with the disclosure is to uncover the effect of

the change in bad debt expense,

due to a change in the estimated percent uncollectible.

So to do this, first we're going to compute the percent of gross accounts

receivable that are expected to be uncollectible in the prior year.

So we take the net accounts receivable on the balance sheet,

add back the allowance to get the gross.

We did that a couple slides ago.

Then we take the allowance divided by the gross to get the percent uncollectible.

Now, before the virtual students even ask the question,

I know this wasn't one of the two methods we learned.

One of the methods we learned were the percent of sales method, but

to figure out that percentage, we need credit sales.

We learned the aging of accounts receivable method.

To that, we needed to know a breakdown of receivables by age.

As users of financial statements, we often don't have those pieces of information.

So as a quick and dirty approach to get the percent uncollectible,

I like to take the allowance, divide it by the gross accounts receivable.

So for instance, at the end of 2008, we have 13,951 of gross accounts receivable.

What percent of those do we expect not to collect?

7.3% or 1,021.

Now what we're going to do is apply the percentage from the prior year,

2.7%, to the current year balance in gross accounts

receivable to get the expected balance.

So this calculation basically says, let's say that TK did not increase

their percent from 2.7 to 7.3 but instead, kept it at 2.7.

If they had, their allowance would be 2.7% of 13,951, or 377.

So that's the expected allowance if they kept last year's rate.

Then as a final step, we just take the difference between those two, and

it tells us how much bad debt expense increased solely due to increasing

the percent of uncollectibles.

So by increasing our assumption of uncollectible percent from

2.7 to 7.3, it added 644 to the bad debt expense.

Now notice the allowance total went up by 800.

So a lot of the increase in the allowance was not due to the growth in accounts

receivable, but rather due to this increased assumption for

the percent of uncollectibles.