By the end of its first year of operations, Swarthout Corporation has credit sales of $560,000 and accounts receivable of $160,000. Given its the first year of operations, Swarthouts management is unsure how much allowance for uncollectible accounts it should establish. One of the companys competitors, which has been in the same industry for an extended period, estimates uncollectible accounts to be 2% of ending accounts receivable, so Swarthout decides to use that same amount. However, actual write-offs in the following year were 25% of the $160,000 (= $40,000). Swarthouts inexperience in the industry led to making sales to high credit risk customers.

Required: 1. Record the adjusting entry for uncollectible accounts at the end of the first year of operations using the 2% estimate of accounts receivable.

2. By the end of the second year, Swarthout has the benefit of hindsight to know that estimates of uncollectible accounts in the first year were too low. By how much did Swarthout underestimate uncollectible accounts in the first year? How did this underestimation affect the reported amounts of total assets and expenses at the end of the first year? Ignore tax effects.

3. Should Swarthout prepare new financial statements for the first year of operations to show the correct amount of uncollectible accounts?