DejaVu Company has been in business for several years and has the following information for its operations in the current year:
Total credit sales ................... $3,000,000
Bad debts written off in the year ............ 60,000
Accounts receivable balance on December 31
(after writing off the bad debts above) .......... 500,000
Required:
a. Assume that DejaVu Company decides to estimate its bad debts expense at 2% of credit sales.
i. What amount of bad debts expense will the company record if it has a credit balance (before adjustment) of $5,000 in its Allowance for Doubtful Accounts on December 31?
ii. What amount of bad debts expense will it record if there is a debit balance (before adjustment) of $5,000 in its Allowance for Doubtful Accounts on December 31?
b. Assume that DejaVu Company estimates its bad debts based on an aging analysis of its year-end accounts receivable, which indicates that a provision for uncollectible accounts of $40,000 is required.
i. What amount of bad debts expense will the company record if it has a credit balance (before adjustment) of $5,000 in its Allowance for Doubtful Accounts on December 31?
ii. What amount of bad debts expense will it record if there is a debit balance (before adjustment) of $5,000 in its Allowance for Doubtful Accounts on December 31?
c. What amount of bad debts expense will DejaVu report if it uses the direct writeoff method of accounting for bad debts?
d. State the two main reasons for using the allowance method to account for bad debts, rather than the direct writeoff method.