A trial balance before adjustment for ABC Company included the following:

Debit Credit

Accounts receivable $80,000

Allowance for doubtful accounts 730

Sales $340,000

Sales returns and allowances 8,000

Required:

1. Describe both the direct write-off method and the allowance method of recognizing bad debt expense. (2 marks)
2. Discuss the reasons why one of the above methods is preferable to the other and the reasons why the other method is not usually in accordance with generally accepted accounting principles. (2 marks)

c. Prepare journal entries for ABC assuming that the estimate of uncollectible is determined by taking (1) 5% of gross accounts receivable and (2) 1% of net sales.