Art World Industries, Inc., was incorporated in 1986 in Delaware, although it is located in Los Angeles. The company employs 25 people to print, publish, and sell limited-edition graphics and reproductive prints in the wholesale market.

The operating expenses for the year ended August 1994 for Art World Industries, Inc., include bad debts expense of \(\$ 6,715.50\). The balance sheet shows an allowance for doubtful accounts of \(\$ 175,477\). The allowance was set up against certain Japanese accounts receivable that average more than 1 year in age. The Japanese acknowledge the amount due, but with the slow economy in Japan lack the resources to pay at this time.

\section*{Instructions}

(a) Which basis for estimating uncollectible accounts does Art World Industries use?

(b) When Art World makes its adjusting entry to record bad debts expense, must it consider a previous existing balance in the Allowance for Doubtful Accounts?

(c) Explain the difference between the direct write-off and percentage of receivables methods. Based on Art World's disclosure above, what important factor would you have to consider in arriving at appropriate percentages to apply for the percentage of receivables method?