At the end of the year, the unadjusted trial balance of Mikell Company included the following accounts:

 

                                                                                          Debit                   Credit

 

                        Sales (80% represent credit sales)                               $2,650,000

                        Accounts Receivable                          $325,000

                        Allowance for Doubtful Accounts                                       2,540

 

Required:

If Mikell uses the accounts receivable aging approach to estimating bad debt expense.  Mikell aged the accounts receivable into four categories as follows:  Current  - $150,000; 30–60 days past due  -  $125,000; 60-90 days past due - $40,000 and >90 days past due - $10,0000.  The company estimated the amount to be uncollectible from each category as Current – 5%; 30-60 – 10%; 60-90 – 15% and >90 – 20%.  Prepare the journal entry to record the bad debt expense for the year and determine the balance in Allowance for Doubtful Accounts after you have made this journal entry.

If the percentage of net sales approach is used, and bad debt expense is estimated to be 1.5% of net credit sales, prepare the journal entry to record the bad debt expense for the year and determine the balance in Allowance for Doubtful Accounts after you have made this journal entry.

Describe the different philosophical approaches to each of these methods for estimating uncollectible accounts expense.  Include in your discussion the advantages and disadvantages of each.

There is another method for accounting for bad debt expense called the direct write-off method.  Discuss why this method is not acceptable under GAAP.